1 A Bird Eye View of the Current World Economy : Trade and Finance J.D. Han King’s University College at UWO Eco 370ppp #1.

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A Bird Eye View

of the Current World Economy:

Trade and Finance

J.D. Han

King’s University College

at UWO

Eco 370 ppp #1

2

GrowthLack of

Investment

Managed FOREX

Consumption Rises;

Savings lags

Government Budget

Deficits rises

Current Account Deficits

Export Promotion

s

Savings Glut

Capital Flows

ㅇ low interests

ㅇ Asians buying U.S. finan/real Assets

External Liability Position Imbalance

Current Account Imbalance

Current Account Surplus

(U.S.) (Asia, etc.)

(offsetting)

1. Current Fundamentals of World Economy

9.11

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2. Flows of Goods

U.S. is a voracious absorber of world products particularly from the East Asia

U.S. Trade Decifits (Import in excess of Exports) has been the largest and increasing rapidly while the East Asian countries have been accumulating Trade Surplus with U.S.

- International Currencies(monies) flow to the East Asia

The East Asia is becoming the ‘Factory of the World’

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1987 1997 2004

U.S. -1,607 -1,409 -6,681

EU 15 Countries 252 883 477

Japan 844 968 1,721

Asia 7 Countries1)

284 367 1,678

(China) 3 370 687

(Taiwan) 180 71 186

(Korean) 101 -84 276

Latin America -98 -668 173

Middle East OPEC

-73 141 909

Note: 1) China, Taiwan, Korea, Singapore, Malaysia, Thailand, and IndonesiaData : IFS, Bloomberg

(100 Million $)

World: Current Account Trends of Major Countries

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Note : 1) ( ) has the share in the worldSources : IFS, Bloomberg

1987 2004

10 Largest Deficits -2,254 (84.5) 10 Lagest Deficits -8,719 (92.9)

U.S. -1,607 (60.2) U.S. -6,681 (71.2)

Canada -134 (5.0) Spain -492 (5.2)

U.K. -126 (4.7) U.K. -419 (4.5)

Saudi Arabia -98 (3.7) Australia -400 (4.3)

Australia -80 (3.0) Turkey -155 (1.7)

India -52 (1.9) Italy -151 (1.6)

France -44 (1.7) Greece -131 (1.4)

Argentina -42 (1.6) Portugal -127 (1.4)

Norway -41 (1.5) Hungary -88 (0.9)

Denmark -30 (1.1) Mexico -74 (0.8)

(100 million U.S. $; %)

World: Current Account Deficits

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Note : 1) ( )has the share in the worldData : IFS, Bloomberg

1987 2004

10 countries 1,862 (96.6) 10 countries 6,343 (73.6)

Japan 844 (43.7) Japan 1,721 (20.0)

Germany 469 (24.3) Germany 1,034 (12.0)

Taiwan 180 (9.3) China 687 (8.0)

Korea 101 (5.2) Swiss 602 (7.0)

Swiss 63 (3.3) Russia 599 (7.0)

South Africa 51 (2.6) Saudi Arabia 315 (6.0)

Kuwait 46 (2.4) Norway 344 (4.0)

Mexico 42 (2.2) Sweden 285 (3.3)

Netherlands 42 (2.2) Singapore 279 (3.2)

Malaysia 26 (1.3) Korea 276 (3.2)

(100 million $, %)

World: Current Account Surplus

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-900

-800

-700

-600

-500

-400

-300

-200

-100

0

100

80 82 84 86 88 90 92 94 96 98 00 02 04

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

1

Current Account Balance

Current Accout Bal./GDP

(billion S) (%)

Current Account Trends of U.S.: ‘Ever Increasing’

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1989 1997 2004

EU 15 countries 10 ( 0.9) 167 ( 9.2) 1,045 (16.0)

(Germany) 80 ( 7.3) 186 (10.2) 459 ( 7.0)

Japan 490 (44.7) 557 (30.5) 752 (11.5)

Asian 7Countries 333 (30.4) 795 (43.5) 2,270 (34.8)

(China) 62 ( 5.6) 497 (27.2) 1,620 (24.9)

(Taiwan) 130 (11.9) 122 ( 6.7) 129 ( 2.0)

(Korea) 63 ( 5.7) -19 (-1.0) 198 ( 3.0)

Latin America 92 ( 8.4) 64 ( 3.5) 841 (12.9)

Middle East OPEC 43 ( 3.9) -2 (-0.1) 221 ( 3.4)

Others 128 (11.7) 245 (13.4) 1,387 (21.3)

(Canada) 99 ( 9.1) 179 ( 9.8) 668 (10.3)

Total 1,096 (100.0) 1,826 (100.0) 6,517 (100.0)

Note : 1) minus (-) indicates the U.S.’s surplus Data : U.S. Government

(100 mil. $, %)

U.S.: Trade Deficits with

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Making a Sense in the Context of Macroeconomics National Income Accounting:

Savings, Investment and Trade: U.S. and Major Partners

Blue- Saving Red – Investment Orange – Current Blue- Saving Red – Investment Orange – Current AccountAccount

Observation:1)Current account Deficits and Investment are + vely corrleated. Current account Surplus and Investment are –vely correlated..

2)Current account Deficits and Savings are –vely correlated. Current account Surplus and Savings are +vely correlated.

Let’s think about:

1. What will be the limit to the U.S. trade deficit?

2. How come the US can increase the trade deficits so much without any constraint?

3. How come this flow of funds and the shifting of production(=income generation) from the U.S. to East Asia does not decrease the National Income of the U.S.?

4. Is there any interconnection between X-M, and S and I?

5. What about the causation in the above relationship? Which causes which?

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For above Question3:

What is happening to the component variables in the following equations?

East Asian Countries’s GNP

Y = C + I + G + X - M

U.S.’s GNP

Y = C + I + G + X - M

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For Q 4, and Q5, we will have a separate appendix for the

National Income Accounting

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3. Flows of Capital

International Liquidity does not stay invested in the East Asia -Monies are flowing back to U.S.

This fuels U.S. imports from Asia This gluts U.S. financial market,

pushing Stock Prices up and Interest Rates down

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1997(A) 2001 2003 2004(B)Change

(B-A)

97-04Cummulative

Current Account Deficits

<Major Deficits Countries> U.S. -822 -2339 -2372 -2542 -1719 -3123

Australia -186 -194 -358 -421 -235 -163

U.K. -109 -104 -70 -372 -163 -211

Mexico - -248 -277 -310 -62 -44

<Major Surplus Countries> Japan 958 1360 1613 1784 825 958

Germany 85 162 169 269 183 128

Swiss 308 355 474 530 222 264

Singapore - 71 88 88 16 85 Taiwan - 226 337 387 161 91

Data : IFS

(billion dollar)

External Liabilities (Debts) Trends

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- 15

- 10

- 5

0

5

10

15

20

25

30

1980 1984 1988 1992 1996 2000 2004

(as of GDP, %)

U.S.: Net External Liabilities (Debts)=Credit from the rest of the World

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Data: U.S. Government Documents

1990~94 1995~99 (A) Post 2000 (B) Net (B – A)

Total 2,710 5,890 18,280 9,690

Asian Countires 1,200 3,010 9,500 6,490

European Countries 1,150 4,280 4,880 600

Latin Americans 210 1,080 1,470 390

(100 mi. $)

Who are buying U.S. Bonds?

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4. FOREX

International Capital Flows accompany the imbalance of Merchandise Flows (in the opposite direction)

Capital Flows (of Currencies) destabilize Relative Prices of Currencies or FOREX rates

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0

25

50

75

100

125

150

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

-800

-600

-400

-200

0

200

400

Current Account

External Value of $

(1billion(%

U.S. : Current Accounts and Currency Value FOREX

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GrowthLack of

Investment

Managed FOREX

Consumption Rises;

Savings lags

Government Budget

Deficits rises

Current Account Deficits

Export Promotion

s

Savings Glut

Capital Flows

ㅇ low interests

ㅇ Asians buying U.S. finan/real Assets

External Liability Position Imbalance

Current Account Imbalance

Current Account Surplus

(U.S.) (Asia, etc.)

(offsetting)

Recap. Current Fundamentals of World Economy

9.11