SMU COR2100 Economics and Society Week 6 PDF

04/08/2024 SMU COR2100 Economics and Society Week 6 Dr Lam San Ling...

04/08/2024 SMU COR2100 Economics and Society Week 6 Dr Lam San Ling 2024-25 Term 1 1 Slide 2 Week 6: agenda  Introduction to globalisation - Trade and financial globalisation - Trends  Globalisation - Benefits and risks - Gains from trade: consumer & producer surplus - Winners and (potential) losers - Introduction to: balance of payments 2  04/08/2024 Slide 3 Globalisation - concept, definitions  Globalisation - “Shift toward more open, integrated economies that participate in foreign trade and investment” [AL&L] - Term is associated with increases in flows of trade, capital, and information, as well as mobility of individuals, across borders. Historically [BIS (2017) - First wave of globalisation o Pre-WWI: sustained increase in trade and financial flows as Great Britain and other European powers channelled investments into their colonies. - Second wave of globalisation o Post-WWII (in the 1950s): when the Bretton Woods system provided stability to global markets. o Far outstripped the first wave. 3 Slide 4 Globalisation - real vs financial (BIS)  BIS* distinguishes between - Trade (or real) globalisation or openness o How open the world (country) is to international trade o Trade openness has grown with manufactured goods trade o Unprecedented expansion of global value chains (GVCs). - Financial globalisation or openness o How open the world (country) is to international financial flows o Increases with trade openness * The Bank for International Settlements (BIS) was founded in 1930. Its mission is to support central banks’ pursuit of monetary and financial stability through international cooperation, and to act as a bank for central banks. 4  04/08/2024 Slide 5 Globalisation - real vs financial (BIS)  BIS distinguishes between - Trade (or real) globalisation or openness o How open the world (country) is to international trade o Trade openness has grown with manufactured goods trade o Unprecedented expansion of global value chains (GVCs). - Financial globalisation or openness o How open the world (country) is to international financial flows o Increases with trade openness  Trade openness and financial openness are intertwined o International trade not only relies on, but generates, financial linkages. o Exports and imports rely heavily on international financing. o FDI boosts international trade. o Banks tend to follow their customers across the world. 5 Slide 6 BIS definitions Source: Shin, H.S. (2017), "Globalisation: real and financial", presentation at BIS 87th Annual General Meeting 6  04/08/2024 Slide 7 Trade (real) globalisation international comparisons 7 Slide 8 Globalisation - trade openness  Quiz: trade openness* - How would you rank the following economies? [currently in alphabetical order] [* Export plus imports as percent of GDP, 2021] o China o Germany o Hong Kong o Indonesia o Luxembourg o Netherlands o Singapore o Vietnam o UK o USA 8  04/08/2024 Slide 9 Globalisation - trade openness  Trade openness: Singapore, 1960-2022 Source: theglobaleconomy.com (for 160 economies) 9 Slide 10 Globalisation - trade openness  Trade openness: US, 1970-2021 Source: theglobaleconomy.com (for 160 economies) 10  04/08/2024 Slide 11 Globalisation - trade openness  Trade openness: China, 1960-2022 WTO member since 11 Dec 2001 Source: theglobaleconomy.com (for 160 economies) 11 Slide 12 Globalisation - China and the world: exposure Source: McKinsey, “China and the World: inside a changing economic relationship” December 2018, (Exhibit 2) 12  04/08/2024 Slide 13 Trade vs financial globalisation 13 Slide 14 AEs: advanced economies EMEs: emerging market economies Source: Graph VI.1 in BIS (2017), 87th Annual Report 14  04/08/2024 Slide 15 Source: Graph V1.1 in BIS (2017), 87th Annual Report 15 Slide 16 Globalisation - real vs financial (BIS)  BIS (2017): what is the evidence on globalisation? - Trade and financial globalisation are intertwined - Since the early-1990s, financial linkages have far outstripped trade  Financial flows can take on a life of their own.  The good, the bad, and the ugly - Economic globalisation has contributed to a substantial rise in living standards and falling poverty over the past half-century o Openness has enhanced competition, spread technology - Globalisation has coincided with rising within-country income inequality in some countries o Technology (not globalisation) is to blame? - Financial globalisation contributes to the risk of financial instability o Global financial system is subject to procyclicality and excesses, much like the domestic financial system. 16  04/08/2024 Slide 17 distributional implications International trade consumers vs producers factors of production: labour, capital, etc 17 Slide 18 Consumer surplus, producer surplus - recap (week 2) P Supply curve (SS) Consumer Consumer surplus surplus P* Producer surplus Demand curve (DD) Q 0 Q* 18 18  04/08/2024 Slide 19 Consumer surplus, producer surplus - country under “autarky” (no trade) P Domestic supply curve (SS) Consumer Consumer Surplus in surplus autarky P(a) P* Producer surplus in Domestic demand curve (DD) autarky Q 0 Q* Q(a) 19 19 Slide 20 Small nation - price taker in world markets (for goods and services) - Suppose Pw < P(autarky) for a good Q: will country import or P export this good? D S World price (Pw) Q Q (produced) Q (consumed) 20  04/08/2024 Slide 21 Small nation - price taker in world markets (for goods and services) - Suppose Pw < P(autarky) for a good (domestic + world) supply P D S World price (Pw)  Imports (M) Q Q (produced) + M = Q (consumed) 21 Slide 22 Small nation (importer) - price taker in world markets (for goods and services) P D S Consumer surplus World price (Pw) Producer surplus Imports Q Q (produced) Q (consumed) 22  04/08/2024 Slide 23 Small nation (importer) - price taker in world markets (for goods and services) Consumption, CS  P Production, PS   Transfer from producers to consumers D S Consumer surplus Transfer: PS to CS World price (Pw) Producer surplus Imports Q Dom. production Dom. consumption 23 Slide 24 Small nation (importer) - price taker in world markets (for goods and services) Consumption, CS  P Production, PS  (but by less)  Net gains from trade D S Consumer surplus Net gains from trade Pw Producer surplus Imports Q Dom. production Dom. consumption 24  04/08/2024 Slide 25 International trade - distributional implications  Import industry - Country does not have comparative advantage o World price lower than autarkic (no trade) price o Country will import to meet (all or part of) domestic demand - Nation as a whole gains from trade o Domestic consumers enjoy lower prices due to imports o Domestic producers may be worse off after trade  Distributional implications! o [Assuming producers are not compensated for loss] 25 Slide 26 Small nation - price taker in world markets (for goods and services) - Suppose Pw > P(autarky) for a good Q: will country import or P export this good? S D World price (Pw) Q Q (consumed) Q (produced) 26  04/08/2024 Slide 27 Small nation - price taker in world markets (for goods and services) - Suppose Pw > P(autarky) for a good (domestic + world) demand P D S World price (Pw)  Exports Q Q (consumed) + X = Q (produced) 27 Slide 28 Small nation (exporter) - price taker in world markets (for goods and services) P Consumer D S surplus World price (Pw) Producer surplus Exports Q Dom. consumption Dom. production 28  04/08/2024 Slide 29 Small nation (exporter) - price taker in world markets (for goods and services) Consumption, CS  P Production, PS   Transfer from consumers to producers Consumer D S surplus World price (Pw) Transfer: CS to PS Producer surplus Exports Q Dom. consumption Dom. production 29 Slide 30 Small nation (exporter) - price taker in world markets (for goods and services) Consumption, CS  P Production, PS  (but by more)  Net gains from trade Consumer D S surplus World price (Pw) Net gains from trade Producer surplus Exports Q Dom. consumption Dom. production 30  04/08/2024 Slide 31 International trade - distributional implications  Export industry - Country enjoys comparative advantage o World price higher than autarkic (no trade) price o Country will export to world market - Nation as a whole gains from trade o Domestic producers have access to lucrative export market o Domestic consumers pay higher prices, may be worse off after trade  Distributional implications! o [Assuming consumers are not compensated for loss] 31 Slide 32 Takeaways: Gains from international trade - Demand/supply analysis: consumer/producer surplus  Nations gain from international trade - Pw are lower: Consumers enjoy lower import prices - Pw are higher: Producers enjoy higher export prices  Distribution of gains from trade - Trade leads to welfare redistribution for consumers, producers - Imports: consumers gain more than producers lose - Exports: producers gain more than consumers lose  Net gains from international trade Who would object to free trade?  who are more organized to lobby policymakers? 32  04/08/2024 Slide 33 Balance of Payments captures components of trade and financial globalisation 33 Slide 34 Globalisation and BOP – definitions  Balance of payments (BOP) - “A record of the flow of economic transactions between residents of one country and the rest of the world” in a particular period of time (e.g. quarter, year) [Carbaugh (2019)] o International transaction: an exchange of goods, services, or assets between residents of one country and those of another o Residents: businesses, individuals, and government agencies that make the country in question their legal domicile. o Note: BOP is a flow (NOT stock) concept - Record of a country’s international trading, borrowing, and lending. [Parkin (2019)] 34  04/08/2024 Slide 35 Globalisation and BOP – components of BOP  BOP comprises - Current Account (CA) - Capital and Financial Account (CFA) - Reserve Assets (R) or official settlements account  BOP always balances - CA + CFA + R = 0 - but components of BOP may be in surplus or deficit 35 Slide 36 BOP components – Current account balance, (merchandise) trade balance, unilateral transfers  Current account (CA) - “Monetary value of international flows associated with transactions in goods, services, income flows, and unilateral transfers” [Carbaugh] - Record of “receipts from exports of goods and services from abroad, net interest income paid abroad, and net transfers abroad (such as foreign aid payment)” [Parkin]  CA balance: can be in surplus or deficit Trade balance (subset of CA) o "Amount a country receives for the export of goods and services minus the amount it pays for its import of goods and services". [Carbaugh] 36  04/08/2024 Slide 37 BOP components – capital and financial account  Capital and financial account (CFA) - CFA transactions include "all international purchases or sales of assets, including private sector and central bank transactions". [Carbaugh] - Assets: include titles to real estate, corporates stocks & bonds, government securities, ordinary commercial bank deposits Private sector financial transactions o Direct investment o Portfolio investment o “Other investment” (mostly banking flows) 37 Slide 38 BOP components – reserve assets  Reserve assets (R) - Reserve assets are "those external assets that are readily available to and controlled by monetary authorities for meeting BOP financing needs, for intervention in exchange markets to affect the currency exchange rates, and for other related purposes (such as maintaining confidence in the currency and the economy and serving as a basis for foreign borrowing)" [IMF BOP manual] - Including: Banknotes, foreign bank deposits, foreign treasury bills, short and long-term foreign government securities, gold reserves, SDRs, and IMF reserve positions. [Note: "Reserve assets", or "Official settlements transactions", is sometimes included as an item under CFA.] 38  04/08/2024 Slide 39 Reserve assets – Why do countries hold reserve assets?  International liquidity [source: Carbaugh] - To finance short-run trade deficits and weather periodic currency crises - Important to developing countries that do not have a readily convertible currency or ready access to international capital markets on favourable terms.  FX intervention or stabilisation [source: Carbaugh] - Central banks buy or sell official reserve assets in private sector markets to support or stabilise exchange rates. [source: Carbaugh]  Other purposes - Such as maintaining confidence in the currency and the economy and serving as a basis for foreign borrowing. [IMF BOP manual] 39 Slide 40 End of Week 6 Thank you  40  04/08/2024 Slide 41 References  AL&L (2021), Economics - Chap 8: trade o Chap 8.4 (trade between countries: winners and losers) o Chap 8.5 (arguments against free trade) - Chap 28: macroeconomics and international trade o Chap 28.1 (how and why we trade) o Chap 28.2 (current account and the financial account)  BIS [available on internet] - Annual Report 2017, Chap VI, "Understanding globalisation" - Hyung Song Shin, "Globalisation: real and financial" (slides, video)  VERY interested in BOP definitions? - IMF (2009), Balance of Payments and International Investment Position Manual, 6th edition, last updated Nov 2013. 41 Slide 42 References (supplementary)  Michael Parkin (2019), Economics - Chap 26 (The exchange rate and the balance of payments) o Balance of payments accounts, p.674  Robert J. Carbaugh, International Economics, 17th edition (Asia edition), 2019 - Chap 10 (The balance-of-payments) 42  04/08/2024 Slide 43 Globalisation - private wealth migration  The Henley Private Wealth Migration Report 2024 - Tracks cross-border migration of “millionaires” (HNWIs with liquid investible wealth >USD 1 million)  Guess: - Which countries attract millionaire immigrants? - Which countries have the highest net outflow of millionaires? - Does Singapore feature in the report? 43 Slide 44 Foreign exchange reserves holdings Source: Wikipedia 44  04/08/2024 Slide 45 ? ? Source: IMF (last updated Jan 2024) 45