Macroeconomics and International Trade
These are my notes on Macroeconomics and International Trade.
International trade enables countries to focus on activities in which they have a competitive advantage.
The current account includes international flows from exports, imports, factor payments, and transfers.
If a country runs a current account deficit, it pays for this by giving its trading partners financial IOUs.If a country runs a current account surplus, it receives financial IOUs from its trading partners.
The world has become more globalized over the past several decades.
Gains from specialization are the economic gains that society can obtain by having some individuals, regions, or countries specialize in the production of certain goods and services.
A producer has an absolute advantage in producing a good or service if the producer can produce more units per hour than other producers can.
A producer has a comparative advantage in producing a good or service when the producer has a lower opportunity cost per unit produced compared to other producers.
A closed economy does not trade with the rest of the world.
An open economy trades freely with the rest of the world.
Net exports are the value of a country’s exports minus the value of its imports. Net exports are also known as the trade balance.
A trade surplus is an excess of exports over imports and is thus the name given to the trade balance when it is positive.
A trade deficit is an excess of imports and is thus the name given to the trade balance when it is negative.
The current account is the sum of net exports, net factor payments from abroad, and net transfers from abroad.
The financial account is the increase in domestic assets held by foreigners minus the increase in foreign assets held domestically.
Net capital outflows are the difference between investment by the home country in foreign countries and foreign investment in the home country.
Foreign direct investment refers to investments by foreign individuals and companies in domestic firms and businesses. To qualify as foreign direct investment, these flows need to generate a large foreign ownership stake in the domestic business.
The process of globalization has produced a highly interconnected world.
International trade enables us to exploit specialization and comparative advantage. Comparative advantage arises when a person or country has a lower opportunity cost of production than another person or country.
Globalization and international trade improve the well-being of most people, but many other people are made worse off, especially low-skilled workers in developed countries who lose their jobs to foreign producers.
A country runs a current account deficit when it has a negative sum of net exports, net payments from abroad for factor payments, and net transfers from abroad. When this happens, there needs to be a corresponding flow of funds in the financial account that pays for the current account deficit. This implied a net increase in domestic assets held by foreigners and a net increase in foreign assets by domestic residents.
A rapid process of globalization has been under way for several decades, increasing the total volume of international trade. Consequently, consumers and workers around the world can now take better advantage of the gains from international trade. Nevertheless, continued progress in globalization is not guaranteed. In fact, an anti-globalization backlash is now occurring, and some trade agreements have been abandoned or renegotiated.
Globalization also makes the enormous inequities across nations more visible. We purchase goods and services produced and assembled by workers, sometimes even children, earning a small fraction of the wages of workers in developed countries. The working conditions in factories in the developing world are far worse than those of most low paid factory workers in foreign countries. Their alternative opportunities for employment are usually worse than these factory jobs in the traded goods sector.