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: 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.

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.

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.

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%).

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.

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).

Quoting Methods:
- Domestic price in terms of foreign currency and vice versa.
- Examples include the exchange rates between GBP and USD/EUR.

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.

Terminology in Fixed Exchange Rates:
- Revaluations (increase) vs. depreciations (decrease) in fixed exchange rate systems.

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

Example Calculation: Price conversions show how to compare domestic goods prices internationally.
- Real Exchange Rate Formula: ε = E * (P/P*)

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.

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

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.

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