2. 1 Welcome to EC 382: International Economics By: Dr. Jacqueline Khorassani Week Nine

3. 2 Week Nine: Class 1 Tuesday, October 30 Tuesday, October 30 14:10-15:00 AC 202 14:10-15:00 AC 202 I have newly graded assignments here; please pick them up I have newly graded assignments here; please pick them up

4. 3 A law that does not allow an international firm to sell its product in an export market for less than it is sold for in its home market. A law that does not allow an international firm to sell its product in an export market for less than it is sold for in its home market. Most countries have it Most countries have it What is antidumping law?

5. 4 A tariff imposed by a country that is designed to increase the price of the imported good by an amount equal to any export subsidies. A tariff imposed by a country that is designed to increase the price of the imported good by an amount equal to any export subsidies. Most nations have this too Most nations have this too What is countervailing duty

6. 5 Attention my dear students Attention my dear students You must know everything in this Chapter on GATT and WTO

7. 6 Pay attention to Pay attention to Table 8.3: See text for details 1422001- Doha Round Aborted1999 Millennium Round Tariffs, services, agriculture 12538.01987-1994 Uruguay Round Tariffs and NTBs 9929.61974-1979 Tokyo Round Tariffs, ag, and dumping 6236.01964-1967 Kennedy Round Tariffs262.41961-1962 Dillion Round Tariffs263.51955-1956 Fourth Round Tariffs383.01950-1951 Third Round Tariffs131.91949 Second Round Tariffs2321.11947 First Round Tariffs2333.2%1931-1947Pre-GATT Major Negotiation # of Countries Tariff Cuts Dates Multilateral Trade Round Source: Data adapted from R.P. Lavergne

8. 7 Assignment Due Class one, next Tuesday, November 6 Due Class one, next Tuesday, November 6 Needs to be typed Needs to be typed It has 20 points It has 20 points You work on this alone You work on this alone –No duplicates –Duplicates receive zero marks

9. 8 Question 1 Visit the WTO’s web page at wto.org to answer the following questions: a)Is Iran a member of WTO? How about Iraq? b)Which country is the newest member of WTO? c)Is the following statement true or false? Explain. “WTO is for free trade at any cost.” d)Is the following statement true or false? Explain. “The voting power of a nation that is a member of WTO depends on its GDP.” e)What was the size of the WTO’s budget last year?

10. 9 Question 2 Search the web (or elsewhere) for at least Two examples of countervailing and/or antidumping duties imposed by Ireland or Europe in the recent years. Name the products and their exporting countries and the nature of the imposed duties. Clearly list your sources.

11. 10 National Income Accounting and the Balance of Payments CHAPTER 11

12. 11 The process used to keep track of GDP and its components. The process used to keep track of GDP and its components. What does GDP measure? What does GDP measure? –A country’s total output per a unit of time –A country’s total income per a unit of time Total output measured in country’s currency with goods/services measured at market prices Total output measured in country’s currency with goods/services measured at market prices What is national income accounting?

13. 12 1. Intermediate goods Only final goods/services are included. Why? Only final goods/services are included. Why? –To avoid multiple counting 2. Non-reported market transactions and activities Informal economy Informal economy Shadow economy Shadow economy –Mostly to avoid paying taxes or following other regulations Illegal goods Illegal goods GDP is understated and provides a conservative estimate of country’s total economic activity GDP is understated and provides a conservative estimate of country’s total economic activity What is excluded from GDP?

14. 13 Nominal GDP Nominal GDP –The value of GDP in current prices. Real GDP Real GDP –The value of GDP in base year prices. How do they relate to each other? How do they relate to each other? What is the difference between nominal and real GDP? Real GDP in year t = (Nominal GDP in year t) * 100 (Price Index in year t)

15. 14 – Y = C + I + G + (X - M) Y = GDP (total production)= total income C = Public’s consumption of goods and services I = private business firms’ investment in equipment, software, structures, and changes in business inventories, and residential investment I = private business firms’ investment in equipment, software, structures, and changes in business inventories, and residential investment G = The purchase of goods and services (even investment goods) by government X = Exports of goods and services M = Imports of goods and services What are the components of GDP? What are the components of GDP?

16. 15 Ireland’s Real GDP in millions of € (source: Central Statistics Office- Ireland) http://www.cso.ie

17. 16 International Economics Week Nine- Class 2 Week Nine- Class 2 –Wednesday, October 31 –11:10-12:00 –Tyndall

18. 17 Don’t forget the Assignment Due Class one, next Tuesday, November 6 Due Class one, next Tuesday, November 6 Needs to be typed Needs to be typed It has 20 points It has 20 points You work on this alone You work on this alone –No duplicates –Duplicates receive zero marks

19. 18 Question 1 Visit the WTO’s web page at wto.org to answer the following questions: a)Is Iran a member of WTO? How about Iraq? b)Which country is the newest member of WTO? c)Is the following statement true or false? Explain. “WTO is for free trade at any cost.” d)Is the following statement true or false? Explain. “The voting power of a nation that is a member of WTO depends on its GDP.” e)What was the size of the WTO’s budget last year?

20. 19 Question 2 Search the web (or elsewhere) for at least Two examples of countervailing and/or antidumping duties imposed by Ireland or Europe in the recent years. Name the products and their exporting countries and the nature of the imposed duties. Clearly list your sources.

21. 20 Are second hand sales in GDP? No No GDP measures the value of newly produced goods and services only. GDP measures the value of newly produced goods and services only.

22. 21 Irish Nominal GDP components in 2006 (millions of €) (source: Central Statistics Office- Ireland)

23. 22 Flow/Stock Variables Stock: Is measured at a given point in time Stock: Is measured at a given point in time Flow: Is measured per unit of time Flow: Is measured per unit of time

24. 23 What are these variables, flow or stock? GDP GDP Price index Price index Exports Exports Unemployment rate Unemployment rate

25. 24 What is X-M equal to? X-M is net exports or the trade balance = exports of goods and services minus imports of goods and services X-M is net exports or the trade balance = exports of goods and services minus imports of goods and services Y + C + G + I + (X-M) Y + C + G + I + (X-M) X-M = Y – (C + I + G) X-M = Y – (C + I + G) Trade Balance = domestic production (supply) – domestic expenditures (demand) Trade Balance = domestic production (supply) – domestic expenditures (demand)

26. 25 If Y< (C+I+G)  X<M  Trade deficit Our income (production, supply) is less than our expenditures (demand) or we produce less than we consume domestically Our income (production, supply) is less than our expenditures (demand) or we produce less than we consume domestically We are borrowing from foreigners We are borrowing from foreigners –flow or stock? Our international indebtedness increases Our international indebtedness increases –flow or stock?

27. 26 This means that in the future Deficits must be paid by producing more than consuming (exporting future consumption). Deficits must be paid by producing more than consuming (exporting future consumption). Trade deficit is the process of importing present consumption and exporting future consumption. Trade deficit is the process of importing present consumption and exporting future consumption.

28. 27 If Y> (C+I+G)  X>M  Trade surplus Our income (production) is more than our expenditures or we produce more than we consume domestically Our income (production) is more than our expenditures or we produce more than we consume domestically We are lending to foreigners We are lending to foreigners – flow or stock? Our international indebtedness decreases Our international indebtedness decreases –flow or stock?

29. 28 This means that in the future our domestic production will be less than our expenditures  importing future consumption. our domestic production will be less than our expenditures  importing future consumption.

30. 29 Trade imbalances denote a country’s preference for present versus future consumption Trade imbalances denote a country’s preference for present versus future consumption Intertemporal Trade Intertemporal Trade –Countries trading production for consumption at different points in time.

31. 30 Production and Income We know that We know that –GDP = C + I + G + (X-M) = Y We also know that We also know that –Y = T + C + S This means that This means that –C + I + G + X - M = T + C + S –I + G + X – M = T + S –I + G + X = T + S + M

32. 31 Injections and leakages I + G + X = T + S + M I + G + X = T + S + M The left side items are all expenditures on domestic output  create income in the country  injections in the income stream The left side items are all expenditures on domestic output  create income in the country  injections in the income stream The right side items are all monies not spent on domestic output  don’t create income in the country  leakages from the income stream The right side items are all monies not spent on domestic output  don’t create income in the country  leakages from the income stream

33. 32 Trade balance, private saving, government saving and business investment I + G + X = T + S + M I + G + X = T + S + M (X – M) = (T- G) + (S – I) (X – M) = (T- G) + (S – I) Trade balance = government saving + (private saving – business investment) Trade balance = government saving + (private saving – business investment) What causes the trade deficit? What causes the trade deficit? –Budget deficit? –Low amount of saving relative to investment?

34. 33 4 strategies to reduce trade imbalance: 4 strategies to reduce trade imbalance: 1) Increasing the level of savings to reduce the trade deficit 2) Reduce the level of investment 3) Increase taxes 4) Reduce government spending How could we reduce trade deficit? (X – M) = (T- G) + (S – I)

35. 34 International Economics Week Nine- Class 3 Week Nine- Class 3 –Wednesday, October 31 –15:10-16:00 –AC 201

36. 35 Don’t forget the Assignment Due Class one, next Tuesday, November 6 Due Class one, next Tuesday, November 6 Needs to be typed Needs to be typed It has 20 points It has 20 points You work on this alone You work on this alone –No duplicates –Duplicates receive zero marks

37. 36 Question 1 Visit the WTO’s web page at wto.org to answer the following questions: a)Is Iran a member of WTO? How about Iraq? b)Which country is the newest member of WTO? c)Is the following statement true or false? Explain. “WTO is for free trade at any cost.” d)Is the following statement true or false? Explain. “The voting power of a nation that is a member of WTO depends on its GDP.” e)What was the size of the WTO’s budget last year?

38. 37 Question 2 Search the web (or elsewhere) for at least Two examples of countervailing and/or antidumping duties imposed by Ireland or Europe in the recent years. Name the products and their exporting countries and the nature of the imposed duties. Clearly list your sources.

39. 38 A summary of all the international transactions of a country’s residents with the rest of the world during a year. A summary of all the international transactions of a country’s residents with the rest of the world during a year. Composed of different accounts Composed of different accounts What is the balance of payments account?

40. 39 In general Any transaction resulting in money (€) flowing into a country is a credit and has a positive sign Any transaction resulting in money (€) flowing into a country is a credit and has a positive sign Any transaction resulting in money (€) flowing out of the country is a debit and has a negative sign Any transaction resulting in money (€) flowing out of the country is a debit and has a negative sign

41. 40 1. Merchandise Balance Exports of goods – imports of goods Exports of goods – imports of goods 2. Balance on Goods & Services Merchandise Balance + export of services – import of services Merchandise Balance + export of services – import of services Goods & Services Balance

42. 41 Current Account Balance Balance on goods and services + income received from investments abroad – income paid to foreigners on their investments in the country + unilateral transfers received – unilateral transfers sent abroad. Balance on goods and services + income received from investments abroad – income paid to foreigners on their investments in the country + unilateral transfers received – unilateral transfers sent abroad. Unilateral Transfers : Unilateral Transfers : –Grants or gifts extended to or received from other countries

43. 42 Ireland Current Account Balance (millions of €) 20052006 Merchandise+28,218 +25, 389 Goods and Services +18,915+17,970 Current Account Balance -5,690-7,276

44. 43 1. Irish resident buys shares of US stock (financial asset) Money leaves country  domestic holdings of foreign assets goes up  debit  negative sign Money leaves country  domestic holdings of foreign assets goes up  debit  negative sign 2. American buys a right to produce something in Ireland (franchise, non financial asset) Money enters the country  foreign holdings of domestic assets goes up  credit  positive sign Money enters the country  foreign holdings of domestic assets goes up  credit  positive sign 3. Irish government sells dollars (official reserve) Money (€) enters the country  Domestic holding of foreign assets goes down  credit  positive sign Money (€) enters the country  Domestic holding of foreign assets goes down  credit  positive sign Examples of Capital Account (financial assets, non-financial assets, official reserves) Items

45. 44 Net increase in foreign holdings of domestic assets - Net increase in domestic holdings of foreign assets Net increase in foreign holdings of domestic assets - Net increase in domestic holdings of foreign assets The Capital Account Balance

46. 45 BOP = Current account balance+ capital account balance + statistical discrepancy = 0 BOP = Current account balance+ capital account balance + statistical discrepancy = 0 Why? Why? The Balance of Payments (BOP)

47. 46 Why is the balance of payments zero? Example Example –2 countries: US & Ireland –US has no €; Ireland has no $ –US buys Irish sweater for $1000 –US Current account balance = ? -$1000 -$1000 –US pays $1000 to Irish exporter or US gives and IOU (a $1000 bond) to Irish Exporter –Is this a capital inflow or capital outflow? Inflow Inflow –US Capital account balance = ? +$1000 +$1000

48. 47 ICA 5: Find (1) merchandise balance, (2) goods and services balance, (3) current account balance, (4) capital account balance and (5) statistical discrepancy in Ireland 1. Ireland exports €50 worth of shoes 2. A German tourist gets a hair cut in Galway (€30) 3. Ireland imports €100 worth of TVs 4. Irish government sends €10 worth of aid to Afghanistan 5. A Japanese buys €90 Irish government bond 6. An Irish tourist goes to movies in Germany (€15) 7. An Irish buys a €55 German bond.