TRADE THEORY National Income Accounting Comparative Advantage Trade Agreements

Accounting Identities Flows Imports = Things (Goods or Services) Exports = Things (Goods or Services; Imports > Exports: net inflow of things Imports < Exports: net outflow of things Stocks THE DIFFERENCE MUST BE ACCOUNTED FOR BY EXCHANGES OF ASSETS OR LIABILITIES

GNP = GNY = GNE [Gross National Product, Income, Expenditure] GNE = Consumption Goods + Investment GoodsGNE = Consumption Goods + Investment Goods GNY = Consumption + SavingsGNY = Consumption + Savings Savings = Investment, Consumption = Consumption Goods IMPORTS = EXPORTS

GNP = GNY = GNE (cont.) GNE = Consumption Goods + Investment GoodsGNE = Consumption Goods + Investment Goods GNY = Consumption + SavingsGNY = Consumption + Savings Savings > Investment Goods Consumption < Consumption Goods IMPORTS < EXPORTS

GNP = GNY = GNE (cont.) GNE = Consumption Goods + Investment GoodsGNE = Consumption Goods + Investment Goods GNY = Consumption + SavingsGNY = Consumption + Savings Savings < Investment Goods Consumption > Consumption Goods IMPORTS > EXPORTS

GNP = GNY = GNE (cont.) SAVINGS - INVESTMENTS= EXPORTS - IMPORTS EXPORTS - IMPORTS

If Domestic Savings and Domestic Investments Don’t Change, Increasing Exports Increases Imports by the Same Amount and vice versa If Exports are Increased and Imports are Held Constant (or Imports Decreased and Exports Held Constant) Domestic Savings Must Increase or Domestic Investments Fall (through exchange and capital controls a decrease in Domestic Investment can be avoided by reducing its efficiency or by reducing total output or both)

Comparative Advantage Food Clothing

Trade Agreements Most Trade Agreements Promote Trade (restrict export promotion and import barriers -- squishy on export barriers)Most Trade Agreements Promote Trade (restrict export promotion and import barriers -- squishy on export barriers) –General –Multilateral and Regional Agreements –Bilateral Agreements

TRADE POLICY REFLECTS DOMESTIC POLITICS Consumers benefit from trade, but their interests are not well represented by organized groups Producers are organized into groups but some are winners from trade some losers