Current Account in Macroeconomics

Balance of Payments (BP) and Interest Rates

  • Closed Economy Scenario

    • In a closed country with underdeveloped monetary systems, balance of payments (BP) remains unchanged regardless of interest rates.

    • Key Point: Interest rates do not attract investments when there is restricted capital mobility.

  • Investor Perspective

    • For investors looking at different countries, interest rates are relevant for making investment decisions if they can purchase bonds easily.

    • Imperfect Capital Mobility: If an investor cannot purchase foreign bonds, interest rates do not influence investment levels.

  • Perfect Capital Mobility

    • In scenarios of perfect capital mobility, BP reacts immediately to changes in interest rates.

    • Increase or decrease in inflows leads to an immediate adjustment in interest rates.

  • Imperfect Capital Mobility Representation

    • Interest rates react to balance of payments in more realistic economic models where capital is imperfectly mobile.

Equilibrium Models and Market Reactions

  • Complex Equilibrium Models

    • In equilibrium analysis across three markets, variables are interconnected. Changes in one variable can affect others, leading to different equilibria based on context (floating vs fixed exchange rates).

    • Changing fiscal or monetary policy will prompt behavioral responses among different curves reflecting various market forces.

  • Critique of Models

    • The described models are considered unrealistic.

    • The focus should be on practical understandings of trade relationships in current international markets.

Introduction to Macroeconomic Lecture

  • Instructor Announcement

    • Hela Miller: Deputy Director of the Institute for Fiscal Studies, introducing a macroeconomics lecture by Meredith Crowley, a professor at the University of Cambridge.

    • The aim: Addressing the contemporary issues in trade wars and globalization.

  • Lecture Content Preview

    • Discussion on the global trade context, including:

    • World Trade Organization (WTO) purpose and functions.

    • China's role in international trade.

    • Importance of solar panel industry and trade relationships.

The World Trade Organization (WTO)

  • Purpose of WTO

    • To facilitate trade agreements and reduce trade barriers among nations.

    • Central role in resolving trade disputes and establishing trading norms.

China's Role in International Trade

  • China’s Position

    • Significant player in global trade post-WTO accession in 2001.

    • The importance of solar panel trade and environmental policy implications.

Trade Wars and Globalization

  • Trade Wars Context

    • Current tension in US-China trade relations; insights into broader global trade issues.

    • Historical background of global trade post-World War II and its evolution through trade agreements under WTO.

  • Growth of Global Trade

    • Data showing trade patterns from 1960 to 2018 with key events influencing trade dynamics (e.g., global financial crisis of 2008, US-China trade war, COVID-19 impact).

    • Explanation of trade growth and stagnation phases, including post-2008 developments and tariff impacts.

Import Tariffs and Trade Policy

  • Current Tariff Environment

    • Overview of import tariffs among WTO member states (e.g., US tariffs in 2013 averaging 3.5%).

    • China’s lower tariffs compared to its income group but higher than developed economies.

  • Economic Impact of Tariffs

    • The inability of the global trading system to address market fragmentation, and increased tariffs observed during trade wars.

The China Shock in the US Economy

  • Employment Impact

    • Analysis of the rising share of Chinese imports and its contributions to the decline in US manufacturing employment.

    • Discussion of other factors affecting employment trends in the US economy.

European Concerns on Trade with China

  • Solar Panel Market Case Study

    • The EU's initial solar energy investments and subsequent policy changes to protect domestic markets against cheap Chinese imports.

    • Import restrictions between 2012 and 2018 and their consequences.

Implications of Trade Fragmentation

  • Future of Trade Fragmentation

    • Market fragmentation predicted based on ongoing geopolitical tensions and policy changes in Europe and the US.

    • Assessment of the EU’s strategy toward becoming self-sufficient in clean technology and responses to Chinese market pressures.

Conclusion and Future Directions

  • Examining the potential for ongoing trade conflicts and the implications for global economic stability

  • Importance of understanding trade rules and international cooperation for continued economic development and sustainability.