Lecture 13 - BEE2039 lecture 13 2025 ele single

Openness in Goods Markets

• Definition: Openness in goods markets refers to the ability of countries to exchange goods and services with minimal trade barriers.

  • Restrictions include tariffs and quotas.

Volume of Imports and Exports

• Volume of Imports: Significant trends in the volume of imports of goods and services are illustrated by IMF Economic Outlook.

• Volume of Exports: Trends in the volume of exports from different economies over time are also sourced from IMF Economic Outlook.

  • Emphasis on the divergence of exports and imports, leading to trade surpluses and deficits.

The IS-LM Model in an Open Economy

• Three Distinct Dimensions of Openness:

  1. Openness in Goods Markets: Restrictions like tariffs and quotas affect trade.

  2. Openness in Financial Markets: Governed by capital controls.

  3. Openness in Factor Markets: Involves the movement of production and labor across borders.

Trade in the UK

• Increased Openness: The UK economy has become more open, with exports and imports rising from 20% of GDP in 1948 to over 30% today.

• Growth of Trade as % of GDP: Increased from 42% in 1960 to around 64% in current times.

• Diverging Trends: Notable divergence in the trends of imports and exports resulting in trade surpluses and deficits over long periods.

Trade Openness Index

• Tradable Goods: Affected by the proportion of aggregate output that consists of tradable goods, which is roughly 60% in the U.S.

• Export Ratio: The UK possesses a lower than average export to GDP ratio among developed countries (approximately 32%).

Trade Terminology

• Levels of Trade Integration:

  • Political Union, Fiscal Union, Monetary Union, Common Market, Customs Union, Free Trade Area, and Preferential Trade Area.

• Key Concepts Defined:

  • Preferential Trade Agreements: Provide certain products access while lowering tariffs but not abolishing them.

  • Free Trade Area (FTA): Elimination of tariffs among member states.

  • Customs Union: Combines FTA with a common external tariff against non-members.

  • Single Market/Common Market: Enhances a Customs Union with free movement of goods, capital, services, and labor.

Consumer Decision-Making in Open Markets

• Domestic vs. Foreign Goods: Consumers must evaluate the consumption and savings while deciding between domestic and foreign goods influenced by the price relative to foreign goods (real exchange rate).

Nominal Exchange Rates

• Quoting Methods:

  • Domestic price in terms of foreign currency and vice versa.

  • Examples include the exchange rates between GBP and USD/EUR.

Exchange Rate Dynamics

• Nominal Exchange Rate Characteristics:

  • Appreciation indicates an increase in the domestic currency's value against foreign currencies.

  • Depreciation indicates a decrease in the value of domestic currency.

Fixed Exchange Rates

• Terminology in Fixed Exchange Rates:

  • Revaluations (increase) vs. depreciations (decrease) in fixed exchange rate systems.

Historical Exchange Rates Analysis

• GBP/EUR Trends: Changes since 2014, highlighting depreciation and exchange rate volatility post-referendum.

Real Exchange Rates Calculation

• Example Calculation: Price conversions show how to compare domestic goods prices internationally.

  • Real Exchange Rate Formula: ε = E * (P/P*)

Movements in Real Exchange Rates

• Implications: Real appreciation indicates a rise in domestic goods' prices relative to foreign goods.

• Big Mac Index: A fun tool to measure real exchange rates using the price of Big Macs globally.

Fluctuations in Exchange Rates

• Trends since 1981: Nominal and real exchange rates generally move together; fluctuations highlighted in major economic events.

Multilateral Exchange Rates

• Terms Defined: Bilateral vs multilateral exchange rates and their importance in comparative price analysis.

  • Also mentions UK trading patterns and the effective exchange rate movements since 1980.

Currency Wars and Trade Wars

• Definition: Currency wars occur when nations attempt to weaken their currency nominally to gain trade advantages.