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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
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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)
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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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
15
- 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