OPEN ECONOMY MACROECONOMICS AMBA Macroeconomics Lecturer:Jack Wu.
Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate...
Transcript of Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate...
![Page 1: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/1.jpg)
Intermediate Macroeconomics, EC2201
L4: National income in the open economy
Anna Seim
Department of Economics, Stockholm University
Spring 2017
1 / 50
![Page 2: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/2.jpg)
Contents and literature
• The balance of payments.
• National income in the open economy.
• Determinants of the current account.
• Global imbalances.
Literature: Jones (2014), Ch. 19. Klein (2016b).
2 / 50
![Page 3: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/3.jpg)
Dimensions of openness
• Openness in goods markets.• Choice between domestic and foreign goods.
• Openness in financial markets.• Choice between domestic and foreign financial assets.• Financial markets typically more open than goods markets.
• Openness in factor markets.• Workers may choose where to work.• Firms may choose where to locate plants.
3 / 50
![Page 4: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/4.jpg)
Extracted from: Jones (2014).
4 / 50
![Page 5: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/5.jpg)
Extracted from: Jones (2014).
5 / 50
![Page 6: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/6.jpg)
Agenda
1. The relation between trade flows and financial flows.
2. The determinants of trade flows and financial flows.
6 / 50
![Page 7: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/7.jpg)
• Goods markets and financial markets closely connected toeach other.
• All transactions with the rest of the world (ROW) aredocumented in a country’s balance of payments.
7 / 50
![Page 8: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/8.jpg)
The balance of payments (BoP)
• Detailed record of a country’s transactions with ROW at agiven point in time.
• Documents trade flows and financial flows.
• Comprises the current account and the capital account.
• Double-entry bookkeeping: all transactions enter twice, i.e.both as debits and credits.
8 / 50
![Page 9: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/9.jpg)
Notation and abbreviations
GDPt : gross domestic product.
GNPt : gross national product.
Ct : private consumption.
It : investment.
Gt : government purchases.
EXt : exports.
IMt : imports.
NXt : net exports (the trade balance).
NIAt : net income from abroad.
NTAt : net transfers from abroad.
CAt : the current account.
CAPt : the capital account.
9 / 50
![Page 10: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/10.jpg)
GDPt : generated using factors of production employed on theterritory of a given country.
GNPt : generated using factors of production owned by domesticresidents.
GNPt = GDPt +NIAt +NTAt ,
where NTAt are net transfers from abroad (mainly foreign aid) andNIAt includes:
• Compensation for work abroad.• Income from the ownership of foreign financial claims.• Non-financial property income (patents copyrights).
10 / 50
![Page 11: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/11.jpg)
The current account
Documents all payments to and from ROW.
CAt = EXt − IMt +NIAt +NTAt = NXt +NIAt +NTAt .
11 / 50
![Page 12: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/12.jpg)
The capital account
Documents net sales of assets to foreign residents.
Comprises:
• Foreign direct investment (FDI).• Financial investment.• Cash transactions.
CAt +CAPt = 0.
12 / 50
![Page 13: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/13.jpg)
GDP and GNP
GDPt = Ct + It +Gt +NXt .
GNPt = Ct + It +Gt +CAt .
GNPt −GDPt = CAt −NXt = NIAt +NTAt .
13 / 50
![Page 14: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/14.jpg)
A fictional balance of payments (Klein, 2016b)
Debit Credit
Imports of goods and services 120 Exports of goods and services 100
Net income from abroad 10
Net transfers from abroad 5
The capital account 5
14 / 50
![Page 15: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/15.jpg)
A fictional balance of payments cont’d.
The trade balance: −20.
The current account: −5.
Note that the debit side and the credit side both sum to 120.
Note that CAt +CAPt = 0.
15 / 50
![Page 16: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/16.jpg)
The national income identity
Yt = Ct + It +Gt +EXt − IMt︸ ︷︷ ︸NXt
, (1)
where Yt is GDP at time t.
Adding and subtracting taxes, Tt , from (1) and re-arranging:(Yt −Tt −Ct
)︸ ︷︷ ︸
SP
+
(Tt −Gt
)︸ ︷︷ ︸
SG
= It +NXt , (2)
where SP and SG denote private and government saving,respectively.
16 / 50
![Page 17: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/17.jpg)
Aggregate saving in an open economy
Letting S ≡ SP +SG we obtain
St = NXt + It . (3)
Re-arranging (3) we obtain:
NXt = St − It . (4)
The international flow of goods, NXt , must be equal to theinternational flow of capital, St − It .
17 / 50
![Page 18: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/18.jpg)
Saving and investment in a closed economy
Consider a closed economy where NXt = 0. This implies:
St = It .
In a closed economy, saving must equal investment.
In an open economy, countries may run trade deficits by borrowingfrom abroad according to (4).
18 / 50
![Page 19: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/19.jpg)
Extracted from: Jones (2014).
19 / 50
![Page 20: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/20.jpg)
Extracted from: Jones (2014).
20 / 50
![Page 21: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/21.jpg)
Extracted from: Jones (2014).
21 / 50
![Page 22: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/22.jpg)
What determines the current account?
• Recall (3): St = It +NXt .
• Two types of saving: accumulation of real capital, It , andaccumulation of financial claims on the rest of the worldresulting from NXt > 0.
• If St > It ⇒ NXt > 0.
• If St < It ⇒ NXt < 0.
22 / 50
![Page 23: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/23.jpg)
What determines saving?
• Given a desire to smooth consumption, sensible to borrowfrom abroad today and pay back tomorrow if
• Productivity is expected to increase, so that you are likely toproduce more in the future than today.
• You want to finance an investment that will improveproduction possibilities in the future.
• Public saving largely governed by the fiscal policy framework.More on this in the Swedish context below.
23 / 50
![Page 24: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/24.jpg)
The Norwegian example
• Large oil and gas findings in the late 1960s.
• Substantial increase in oil production (exports) from themid-1970s onwards.
• Norway went from a 12 percent current account deficit in1977 to a 16 percent current account surplus in 2007.
24 / 50
![Page 25: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/25.jpg)
A model of the current account (Klein, 2016b)
Consider a country that exists for two periods, t = 1,2.
Production possibilities are described by y1 ≥ 0, y2 ≥ 0 and
y21 + y2
2 ≤ 2, (5)
where yt is output in period t.
The country can borrow and lend in international capital marketswhere the rate of return is r .
Letting ct denote consumption, preferences are represented by
u(c1,c2) = c1 · c2. (6)
25 / 50
![Page 26: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/26.jpg)
Letting s denote saving in period 1 it must be true that
c1 = y1− s, (7)
andc2 = y2 + (1 + r)s. (8)
Combining (7) and (8) and re-arranging we obtain theintertemporal budget constraint:
c1 +c2
1 + r= y1 +
y2
1 + r. (9)
26 / 50
![Page 27: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/27.jpg)
Extracted from: Klein (2016b).
27 / 50
![Page 28: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/28.jpg)
Optimal consumption choice
We note that along any indifference curve
u(c1,c2) = c1 · c2 = k , (10)
where k is a constant.
Differentiating (10) with respect to c1 we obtain:
c2 + c1dc2
dc1= 0. (11)
Re-arranging, we find the slope of an indifference curve:
dc2
dc1=−c2
c1. (12)
28 / 50
![Page 29: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/29.jpg)
To find the slope of the budget line, differentiate (9) with respectto c1:
1 +1
(1 + r)
dc2
dc1= 0. (13)
Re-arranging (13) we obtain:
dc2
dc1=−(1 + r). (14)
Combining (12) and (14), we find that optimal consumptionsatisfies:1
c2
c1= (1 + r). (15)
1Note that we could also solve this problem of constrained optimisation byusing the Lagrangian, see Klein (2016b).
29 / 50
![Page 30: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/30.jpg)
Optimal production choice
To find the optimal production choice, find the slope of theproduction possibility frontier (PPF). Differentiating (5) withrespect to y1:
2y1 + 2y2dy2
dy1= 0. (16)
Re-arranging (16) we find that the slope is given by:
dy2
dy1=−y1
y2. (17)
Combining (17) and (14) we find that optimal production satisfies:
y1
y2= (1 + r). (18)
30 / 50
![Page 31: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/31.jpg)
The trade balance
Equation (7) implies that the trade balance in period 1 is given by:
CA = s = y1− c1. (19)
31 / 50
![Page 32: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/32.jpg)
Example 1: r = 0
Equation (18) implies y1 = y2.
Equation (5) implies 2y21 = 2 so that y1 = y2 = 1.
Equation (15) implies c2 = c1.
Equation (9) suggests 2c1 = 2 so that c1 = c2 = 1.
Equation (19) suggests CA = y1− c1 = 0.
32 / 50
![Page 33: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/33.jpg)
Example 2: r = 6
Equation (18) implies y1 = 7y2.
Equation (5) implies (7y2)2 + y22 = 2⇔ 50y2
2 = 2. We obtain: y2 = 1/5and y1 = 7/5.
Equation (15) implies c2 = 7c1.
Equation (9) suggests c1 + 7c17 = 7
5 + 135 ⇔ 2c1 = 10
7 . We obtain:c1 = 5/7 and c2 = 5.
Equation (19) suggests CA = y1− c1 = 24/35.
33 / 50
![Page 34: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/34.jpg)
Conclusions
• A higher interest rate makes the country produce more, andconsume less, in period 1.
• A higher interest rate thus results in a CA-surplus.
34 / 50
![Page 35: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/35.jpg)
The real exchange rate
The choice between domestic and foreign goods affected by theirrelative price: the real exchange rate.
The real exchange rate, q, is defined:
q =EP∗
P(20)
where E is the nominal exchange rate (in domestic currency perunit of foreign currency), P the domestic price level and P∗ theforeign price level.
35 / 50
![Page 36: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/36.jpg)
The current account and the real exchange rate
A real depreciation, ∆q > 0 makes domestic goods relativelycheaper.
A real appreciation, ∆q < 0 makes foreign goods relatively cheaper.
Next: the effect of a real depreciation on the current account.
36 / 50
![Page 37: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/37.jpg)
Notation
CA: the current account in terms of domestic goods.
EX : exports in terms of domestic goods.
IM∗: imports in terms of foreign goods.
Y : disposable domestic income.
Y ∗: disposable foreign income.
q: the real exchange rate as defined above.
37 / 50
![Page 38: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/38.jpg)
For simplicity, assume that CA = NX .
Exports increasing in q and Y ∗:
EX = EX (q,Y ∗), (21)
where ∂EX/∂q ≡ EXq > 0 and ∂EX/∂Y ∗ > 0.
Imports decreasing in q and Y :
IM∗ = IM∗(q,Y ), (22)
where ∂ IM∗/∂q ≡ IM∗q < 0 and ∂ IM∗/∂Y > 0.
38 / 50
![Page 39: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/39.jpg)
The current account:
CA(q,Y ∗,Y ) = EX (q,Y ∗)−q · IM∗(q,Y ). (23)
q · IM∗(q,Y ) measures imports in terms of domestic goods so thatall terms in (23) are expressed in terms of the same numeraire.
The volume effects of a depreciation, EXq > 0 and IM∗q < 0,improve the CA.
The value effect of a depreciation, increasing the value of importsmeasured in domestic goods through the direct effect on q in (23),worsen the CA.
39 / 50
![Page 40: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/40.jpg)
The Marshall-Lerner condition
Wanted: a condition for when
∂CA
∂q> 0.
Recall:d (f (x)g(x))
dx= fx(x)g(x) +gx(x)f (x).
This implies:
∂ (q · IM∗(q,Y ))
∂q= IM∗(q,Y ) +q · IM∗q(q,Y ).
40 / 50
![Page 41: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/41.jpg)
Differentiating (12)
∂CA
∂q= EXq− IM∗−q · IM∗q . (24)
Pre-multiplying (24) by q/EX :
q
EX
∂CA
∂q=
q ·EXq
EX− q · IM∗
EX−
q2 · IM∗qEX
.
Assume that CA = 0 initially so that EX = q · IM∗. This implies:
q
EX
∂CA
∂q=
q ·EXq
EX− q · IM∗
q · IM∗−
q2 · IM∗qq · IM∗
=q ·EXq
EX−1−
q · IM∗qIM∗
.
41 / 50
![Page 42: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/42.jpg)
We conclude:
∂CA
∂q> 0⇔ q ·EXq
EX︸ ︷︷ ︸η
−q · IM∗qIM∗︸ ︷︷ ︸
η∗
> 1,
where the price elasticity of exports, η , and the price elasticity ofimports, η∗, are defined so that they will be positive.
The Marshall-Lerner condition:
dCA
dq> 0⇔ η + η
∗ > 1
42 / 50
![Page 43: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/43.jpg)
The J-curve
Extracted from: Krugman, P.R., Obstfeld. M. and Melitz, M.J., (2015), International Economics: Theory andPolicy, Pearson Education Ltd.
43 / 50
![Page 44: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/44.jpg)
Price elasticities of exports and imports
Extracted from: Krugman, P.R., Obstfeld. M. and Melitz, M.J., (2015), International Economics: Theory andPolicy, Pearson Education Ltd.
44 / 50
![Page 45: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/45.jpg)
Global imbalances
• Over the last 15 years, some countries have been running largecurrent account deficits (US, UK, Greece, Portugal, Spain) whileothers have been running large current account surpluses (China,Germany, Japan, the oil exporters).
• ”Saving glut” in China, partly due to inadequate welfare andpension systems, creating incentives for private saving.
• Capital flows from China to the US.
• Concern: global economy sensitive to sudden disruptions to financialflows.
• Cause of the financial crisis of 2007-2009(?)
45 / 50
![Page 46: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/46.jpg)
Global imbalances
Extracted from: EEAG (2011), The EEAG Report on the European Economy 2011, CESifo, Munich.
46 / 50
![Page 47: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/47.jpg)
Extracted from: Jones (2014).
47 / 50
![Page 48: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/48.jpg)
Extracted from: Vredin, A., Floden, M. Larsson, A. and Ravn, M.O. (2012), Simple Rules, Difficult Times,Economic Policy Group Report 2012, SNS Forlag.
48 / 50
![Page 49: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/49.jpg)
The Swedish current account
• Large current account deficits prior to the crisis in the 1990s.
• Eliminated by large nominal (and real) depreciation when thefixed exchange rate was abandoned in 1992.
• Large current account surpluses from the mid 1990s onwards,largely due to fiscal consolidation.
• Note: more on exchange rates in Lecture 5. Details on theSwedish fiscal framework in Lecture 7.
49 / 50
![Page 50: Intermediate Macroeconomics, EC2201 L4: National income in .../menu/standard/fil… · Intermediate Macroeconomics, EC2201 L4: National income in the open economy Anna Seim Department](https://reader033.fdocuments.in/reader033/viewer/2022052719/5f06f7c27e708231d41aa254/html5/thumbnails/50.jpg)
What we did
• The balance of payments.
• National income in the open economy.
• Determinants of the current account.
• Global imbalances.
Literature: Jones (2014), Ch. 19. Klein (2016b).
50 / 50