International Macroeconomics - Ireland as a Small Open Economy

Introduction to International Macro Topics

International Macroeconomics

  • Macro: Focuses on countries and standard macroeconomic variables.

  • International: Deals with interactions across countries.

  • These interactions are crucial, especially for small open economies like Ireland.

  • Necessitates relaxing assumptions from previous modules (e.g., Savings = Investment).

  • Investment can originate from abroad.

  • Introduces new factors when analyzing fiscal and monetary policies.

Practical Applications

  • International macro framework is essential for understanding current issues and discussions.

    • Should trade be facilitated, or should tariffs be imposed?

    • What are the effects of international capital flows and investment on local economies?

    • What is the relationship between inflation and international trade?

    • Who benefits and who loses from globalization?

    • Is Eurozone membership advantageous or detrimental to the economy?

    • How do monetary policies impact currency values and inflation?

Real-World Examples of International Macro Issues

  • Tariffs: Donald Trump's threats to impose tariffs on China, Canada, and Mexico in retaliation for illegal migration and drug trafficking.

  • Trade Agreements: The EU-Mercosur trade agreement, aiming to create growth, jobs, and sustainable development by cutting import tariffs.

  • Irish beef sector potentially losing €130m under the Mercosur trade deal.

  • Brexit: Declining support for Brexit in the UK, highlighting public sentiment on the decision.

  • Tax Wars: Donald Trump's threats of tax wars over US multinationals, potentially affecting Ireland, which hosts many US multinational regional headquarters.

Recent Trends in International Trade

  • Significant growth in international trade due to new technologies, institutional changes, and improved infrastructures.

  • Modeling a country as a closed economy is increasingly unrealistic.

  • Trade involves goods, services, capital (finance), and migration of people (workers).

  • These factors have shaped the world economy, especially for Ireland.

  • There is often intense political debate over these issues.

Global GDP Growth

  • The total value of global production has increased fivefold in the last 55 years.

Globalization Trends

  • International trade (exports) has increased by a factor of 10 since the mid-1980s.

  • Trade growth has largely outpaced production growth.

Production in Ireland

  • Irish GDP has increased more than 10 times in the same period.

Production and Exports in Ireland

  • Irish exports have increased nearly 10 times more than Irish production.

  • In 2023, production was 13 times that of 1970, and exports were more than 100 times that of 1970 (accounting for inflation).

Imports and Exports

  • Worldwide, total exports and imports must add up to the same amount, as one country's exports are another's imports.

  • For a single country, this is not necessarily the case.

  • Ireland's exports have been higher than its imports in the past 30 years.

Irish Balance of Payments

  • Net exports (NX) is the difference between exports and imports.

  • In Ireland, NX has generally been positive.

  • A large trade volume can have a NX close to 0 (or negative).

  • NX indicates the direction of the flow.

Exports/GDP Ratio

  • Exports can be larger than GDP due to the equation GDP = C + I + G + NX.

  • Irish exports accounted for about one-third of GDP in 1970, increasing to over 130% in 2020.

Trade Openness

  • A measure of trade openness is (Import + Exports) / GDP.

  • Ireland: over 240% of GDP.

  • EU area: 83% of GDP.

Irish Imports and Exports by Country (2019)

  • Other EU countries are the most significant market due to the common currency and lack of trade barriers.

Irish Exports by Product (2019)

  • Primarily Pharmaceuticals & Chemicals, along with a variety of agricultural products.

Trade Dynamics in the US

  • Both exports and imports increased as a share of GDP, but imports grew at a faster pace, resulting in a negative NX.

Trade Dynamics in China

  • Both exports and imports increased as a share of GDP, peaking in the early 2000s.

  • Exports grew at a faster pace, resulting in a positive NX.

Summary of International Trade

  • Massive increase in international trade.

  • Differences across countries in trade openness.

  • Differences in the sign of net flows (net exporters vs. net importers).

  • High exports might indicate a lack of internal demand from domestic consumers.

International Transactions Beyond Trade

  • International transactions include exchange in assets and liquidity (e.g., an American company investing in Ireland).

  • Capital moves from one country to another (e.g., from the US to Ireland).

  • US savings translate into Irish investment.

  • Breaks the S = I equation derived in intermediate macroeconomics.

Financial Globalization

  • Globalization often refers to flows of capital and investment across countries.

  • Flows occur in both directions (Irish residents investing abroad and foreign residents investing in Ireland).

Foreign Assets and Liabilities in Ireland

  • Significant increase in foreign assets owned by residents and Irish assets owned by non-residents.

Ireland’s Net International Investment Position (NIIP)

  • NIIP = Difference between foreign assets and liabilities.

  • Level vs. difference - a country can have 0 NIIP and still be fully integrated into the international financial market.

Non-Linear Trends in Globalization

  • Referencing John Maynard Keynes on pre-WW1 global trade, highlighting the ability to order products from around the world easily.

Articles on Globalization

  • Three relevant articles on the state of globalization and predictions for 2024 from the Financial Times (FT).

    • Keynes’ warnings

    • Comments and recent statistics on international trade and exchanges

    • Globalization is not dying, it’s changing

Small Open Economies (SOE)

  • Definition: An economy that participates in international trade but is small enough that its policies do not alter world prices, interest rates, or incomes.

  • Small open economies are price takers.

  • Ireland is a small but successful open economy.

  • Being a small open economy shapes policy implications.

  • Most countries are now considered SOEs.

Implications of Being a Price Taker

  • Inflation rates in selected countries (projections as of June 2022) show how external factors like the war in Ukraine can impact inflation.

Interest Rates and Monetary Policies

  • A global backlash is brewing against the Federal Reserve (the Fed) due to spillover effects of US borrowing costs on the rest of the world.

Plans for the Next Lecture

  • International trade

  • The concept of comparative advantage

  • Gains from specialization: existing evidence

  • Broader considerations on international trade and interdependence