Lectures in Macroeconomics- Charles W. Upton Investment and the Trade Balance

Net Foreign Investment and the Trade Deficit (As % of GDP),

Investment and the Trade Balance Net Foreign Investment and the Trade Deficit (As % of GDP), Which is the Chicken and Which is the Egg?

Investment and the Trade Balance Net Foreign Investment and the Trade Deficit (As % of GDP), Which is the Chicken and Which is the Egg? Previous explanations talk about the investment as a way of covering our spending. Maybe it is the other way around

Investment and the Trade Balance (d) Investment Opportunities D= I – S + (G-T)+X-M 0 S This is the place to invest because the economy is good.

Investment and the Trade Balance (d) Investment Opportunities D= I – S + (G-T) +X-M 0 S This is the place to invest because the economy is good. Many economists place their bets on this explanation.

Investment and the Trade Balance An Analogy You discover an undeveloped Caribbean island with resort potential. You persuade the locals to exploit it.

Investment and the Trade Balance An Analogy You discover an undeveloped Caribbean island with resort potential. You persuade the locals to exploit it. Huge investments in hotels, roads, and infrastructure are required.

Investment and the Trade Balance An Analogy You discover an undeveloped Caribbean island with resort potential. You persuade the locals to exploit it. Huge investments in hotels, roads, and infrastructure are required. A huge negative balance on capital account.

Investment and the Trade Balance An Analogy You discover an undeveloped Caribbean island with resort potential. You persuade the locals to exploit it. Huge investments in hotels, roads, and infrastructure are required. A huge negative balance on capital account. Is this bad? Obviously not.

Investment and the Trade Balance Evidence Does the trade balance track saving?

Investment and the Trade Balance Evidence Does the trade balance track saving? No

Investment and the Trade Balance Evidence Does the trade balance track saving? No Does the trade balance track government deficits?

Investment and the Trade Balance Evidence Does the trade balance track saving? No Does the trade balance track government deficits? No

Investment and the Trade Balance Evidence Does the trade balance track saving? No Does the trade balance track government deficits? No Does the trade balance track investment opportunities?

Investment and the Trade Balance Evidence Does the trade balance track saving? No Does the trade balance track government deficits? No Does the trade balance track investment opportunities? Yes

Investment and the Trade Balance Trade and Investment 19 th Century Trade Balances Post World War II The Business Cycle International Comparisons

Investment and the Trade Balance 19 th Century Trade Balances In the last part of the 19 th century, the United States ran a substantial current account deficit, financed substantially by the British.

Investment and the Trade Balance 19 th Century Trade Balances In the last part of the 19 th century, the United States ran a substantial current account deficit, financed substantially by the British. There were significant investment opportunities in this rapidly growing economy.

Investment and the Trade Balance 19 th Century Trade Balances In the last part of the 19 th century, the United States ran a substantial current account deficit, financed substantially by the British. There were significant investment opportunities in this rapidly growing economy. Both Americans and the British benefited. We got a higher capital stock, while British investors earned a higher return than they could at home.

Investment and the Trade Balance Trade after World War II At the end of WW II, the United States ran a significant current account surplus, for exactly the same reason. The War devastated Europe, and investment opportunities there were highly profitable.

Investment and the Trade Balance Balance on Current Account As % of GDP When times are good, there are investment opportunities and the trade balance is bad.

Investment and the Trade Balance Balance on Current Account As % of GDP

Investment and the Trade Balance Balance on Current Account As % of GDP

Investment and the Trade Balance Trade Deficits and Business Cycles

Investment and the Trade Balance G-7 Experience

Investment and the Trade Balance G-7 Experience Don’t invest in slow growing countries

Investment and the Trade Balance End ©2005 Charles W. Upton. All rights reserved