ECO 6716 POWERPOINT 0.50 Institutions Fall 2024.pdf

World Trade Organization (WTO) – The WTO “sets the rules” for international trade. World Bank – The World Bank makes loans to help develop less developed nations. International Monetary Fund (IMF) – The IMF helps nations with balance of payments difficulties. Export-Import Ba...

World Trade Organization (WTO) – The WTO “sets the rules” for international trade. World Bank – The World Bank makes loans to help develop less developed nations. International Monetary Fund (IMF) – The IMF helps nations with balance of payments difficulties. Export-Import Bank (EX-IM) – The Ex-Im helps finance U.S. international trade. The WTO, World Bank and IMF are international organizations; the Ex-Im is a US government agency I have lots of videos, especially for the WTO and EX-IM  Smoot- Hawley Tariff GATT Created WTO Created 1920 1930 1947 1986 Now Great World War 2 Uruguay Depression Round Smoot-Hawley Tariff ◦ Passed in 1930 ◦ Raised tariffs to highest level since 1828. ◦ Helped cut U.S. international trade by 60%. Reciprocal Trade Agreement Act (1934) 1. The President negotiated tariffs rather than Congress unilaterally setting them. 2. Tariff reductions were contingent upon the partner nation reducing its tariffs. 3. The Congress had to approve with a 51% majority rather than 67%. 1947 General Agreement on Tariffs and Trade (GATT), a set of trade rules, was signed in 1947 by 23 nations. GATT ◦ focused on lowering and eliminating tariffs. ◦ tried to eliminate quantitative restrictions on imports and exports. ◦ helped reduce trade costs. ◦ trade disputes among members were settled by negotiation ◦ conducted “rounds” of negotiations. – In 1986, the Uruguay Round created the WTO, the World Trade Organization ◦ https://www.youtube.com/watch?v=j04P3SBBfAw The WTO helps provide international rules governing trade. Carried over the GATT are five principles: ◦ 1. Non-discrimination. – Trade rules, regulations, and laws must embody two major components: the most favored nation (MFN) rule, and the national treatment policy. ◦ 2. Reciprocity. – Reciprocity means that a nation negotiating with another nation about cutting its tariff on, say, oranges expects that the other nation will cut its tariff on some other relevant good, say automobile tires ◦ 3. Binding and enforceable commitments. – The member nations negotiate their tariff commitments and set the maximum rates—“ceiling bindings”—in lists. ◦ 4. Transparency. – WTO members must publish their trade regulations, must notify the WTO of changes in trade policy, and must respond when other members request trade information. ◦ 5. Safety valves. – Three circumstances in which governments are legitimately able to restrict trade: a. allow for the use of trade measures to attain non-economic objectives (eg, environmental concerns); b. aim at ensuring "fair competition"; and c. permit intervention in trade for economic reasons. Dispute Settlement Body: The Dispute Settlement Body (DSB) hears disputes about policy violations that arise between member nations. – After a dispute is lodged, 60 days of consultations follow. – If mediation fails, a 3-to-5-person panel of experts is appointed and within 6 months a final report is sent to the DSB. – The disputants have 60 days to appeal, after which the DSB must adopt the decisions unless a consensus objects. – If a party appeals, at least 3 members of a 7 party Appellate Board hear an appeal. The decision must be reached within 90 days and must be adopted unless a consensus objects. The Dispute Settlement Body was designed to better enforce WTO trade policies than was the situation in the GATT. GATT } Official complaints were adjudicated by a panel of 3 arbiters. } To be enforced, the decision must be approved by consensus. } Because consensus was unlikely, disputes generally were negotiated. WTO } Disputes are litigated. } After appeal, the WTO must adopt the decision unless a consensus rejects it. Did this work? 2009/2010: Background http://www.youtube.com/watch?v=fUSaAJ7IVco https://www.youtube.com/watch?v=bLFYChw5c0Y 2012: Japan, the EU, and United States file a complaint https://www.youtube.com/watch?v=SA63FsUVBk4 2014: The WTO Outcome https://www.youtube.com/watch?v=ZHJ3G-yoet0 China appealed: https://www.youtube.com/watch?v=hYUcnMiDI_0 Basically as an FYI: After 2016, not much happened (possibly Covid, which decreased demand) until more recently, with a huge demand increase due to EVs  The United States has 3 general objections to the Appellate Board: – Rather than just consider the law, the Appellate Board has frequently overruled the factual conclusions reached by the Dispute Settlement Body. – The Appellate Board has issued advisory opinions that are not necessary to resolve the dispute but which then become law. – The Appellate Board looks to past decisions as near-binding precedent. The United States also has specific objections to the Appellate Board First some definitions: Countervailing duty: A tariff imposed when a domestic industry is harmed by subsidized imports. Voluntary export restraint (VER): A limit on the quantity of a good that will be exported, which is self-imposed by the exporting country. Antidumping duty: A tariff imposed when a foreign company exports a product and sells it at a price lower than the price it charges in its home market.  Countervailing Duty Countervailing duty: A tariff imposed when a domestic industry is harmed by subsidized imports. ◦ The WTO defines a subsidy as a financial contribution by a government or any public body which confers a benefit to the recipient. ◦ The WTO agreement allows other governments to impose countervailing duties where there is material injury to the competing domestic industry from a subsidy. The United States lost a countervailing duty case on tariffs imposed on Chinese firms that received financial contributions given to them by Chinese state-owned enterprises (SOEs).  Voluntary Export Restraint Voluntary export restraint (VER): A limit on the quantity of a good that will be exported, which is self-imposed by the exporting country. ◦ Prior to the WTO, the United States frequently used Voluntary Export Restraints to limit imports. ◦ But the 1994 WTO agreement prohibited VERs. ◦ Once prohibited, the United States switched to antidumping duties.  Antidumping Duty Dumping: A company exports a product at a price and sells it at a lower price than it charges in its home market. ◦ The WTO agreement allows governments to act against dumping when there is material injury to the competing domestic industry by imposing a tariff, called an “Antidumping Duty”. The amount of the antidumping duty depends on the difference between the foreign price and domestic price. WTO agreement said nothing about the policy of “zeroing” when calculating this difference. WTO rules on antidumping duties state that the adjudicators are to give deference to “domestic investigating authorities”. Example of zeroing: Dumping requires calculating the difference in prices: Without Zeroing With Zeroing Home Foreign Price Home Foreign Price Month price price difference Month price price difference 1 100 70 30 1 100 70 30 2 50 70 −20 2 50 70 0 3 90 70 20 3 90 70 20 4 60 70 −10 4 60 70 0 5 90 70 20 5 90 70 20 Total Price difference 40 Total Price difference 70 The home price is 8 above The home price is 14 above the foreign price. An 8 the foreign price. A 14 tariff can be imposed. tariff can be imposed. The United States has lost most of the more than 100 antidumping cases filed against it. ◦ What are the specific US objections? – The United States uses zeroing to calculate the price difference but the WTO ruled against the policy of zeroing. – The United States contends that the adjudicators were not giving deference (or credence) to the US investigating authority, the US Trade Representative.  US response: ◦ As members’ terms expired, the United States blocked appointments to the Appellate Board. ◦ Currently there are zero members of the Appellate Board. ◦ Consequently, any nation that loses a case in front of the Dispute Settlement Body simply appeals the decision to the Appellate Board … where it sits … undecided … History of the World Bank and IMF in a semi-dated video: ◦ https://www.youtube.com/watch?v=lN3qrFA4jXc Bretton Woods Objective The World Bank is an international financial institution that makes loans to developing nations. The World Bank has two major institutions: 1. International Bank for Reconstruction and Development: Its goal is to fight poverty by loaning to creditworthy middle-income and poor nations. IBRD borrows by issuing World Bank bonds. These bonds are rated AAA (they are guaranteed by the member governments) and can be bought and sold by private individuals. 2. International Development Association: The IDA was created in 1960 with the mission of providing long-term, zero interest rate (or very low interest rate) long-term loans to the world’s 75 poorest countries. The IDA is funded by donations from member countries every 3 years and by profits from the IBRD. Governance Board of Governors The Board of Governors, which meets once a year, has 189 members, each generally a member country’s minister of finance or minister of development. President The President manages the World Bank. As the largest shareholder, the United States nominates the President, who has always been an American citizen. Board of Directors There is a 25-member board of directors. The five largest shareholders appoint five members; the other twenty are elected by the Board of Governors. Five largest shareholders: The Board of Directors meets twice a week to1.approve Unitedloans, States new policies, the budget, and so forth. 2. Japan 3. China 4. Germany 5. United Kingdom  The IMF is an international financial institution with 190 member nations. Objectives EXAMPLE: Sri Lanka 2022 crisis Background and IMF role: – Promotes international monetary cooperation https://www.youtube.com/watch?v=Eh8aMOnYTaU – Makes resources available to member nations with balance of Result: payments difficulties; lender of last resort and loans are often https://www.youtube.com/watch?v=NSt6FRMkdPQ conditional IMF Conditions: https://www.youtube.com/watch?v=28OO294Zyfw – Aims to secure financial stability Results: Funding https://www.youtube.com/watch?v=uY_56-sPrpk IMF’s source of funding is from quotas. Each member pays an assigned quota, based largely on its GDP Governance Board of Governors The Board of Governors has 1 member from every member nation. The Board of Governors elects the members of the Executive Board. Executive Board The Executive Board has 24 members elected by the Board of Governors The Managing Director (traditionally from Europe and selected by the Executive Board) serves as Chair of the Executive Board. The Executive Board is in charge of the day-to-day operations of the IMF. The World Bank and IMF are controversial: ◦ https://www.youtube.com/watch?v=BKZGk0DN1Mg Objective The Export-Import Bank (EX-IM Bank), located in Washington DC, is an agency of the U.S. government whose mission it is “to assist in financing the export of U.S. goods and services to international markets.” Operations ◦ The EX-IM Bank provides: – working capital guarantees (pre-export financing for the U.S. exporter) – export credit insurance for the exporter (protects the exporter in case of non-payment by the buyers ) – loan guarantees and direct loans to the buyer (lowers the cost of loans to buyers) General Overview of the three operations: http://www.youtube.com/watch?v=ZemvZY1lzgU https://www.youtube.com/watch?v=5Ct7Ea_zmSU https://www.youtube.com/watch?v=pXmhoFuz1-8 Governance The EX-IM Bank is similar to a typical investment bank insofar as it is overseen and managed by a 5-member Board of Directors (of which the Chair runs the bank). Members must be approved by the US Senate. – A quorum (3 members) must approve loans exceeding $10 million. Unlike a typical investment bank, the EX-IM Bank obtains its funds by borrowing from the U.S. government. In 1945 the EX-IM Bank was made an independent government agency. As such it needs its charter renewed. The last renewal was in 2019 for 7 years. Winners – Exporters – Foreign Importer – https://www.youtube.com/watch?v=wUfDu-1Rq10 Losers – U.S. producers of competitive products – U.S. taxpayers – https://www.youtube.com/watch?v=z4KL0WUaaRI&t=79s Economists’ (conservative) view – https://www.youtube.com/watch?v=imciXW_LH9k Managerial Lesson Regardless of the controversy or the future, if you are exporting you ought to look into the Export-Import Bank’s programs. 1  M ilton Friedman Start with a very general set of observations by M ilton Friedman: https://www.youtube.com/watch?v=3HkrEC0JNGs 2  Abs ol u te Advan tage A bsolute advantage: when a nation can produce more of a product than its trading partner during a given time period. Prod uc ti on i n 1 d ay United States China Comp ute rs 60 4 or Cars 4 20 3  Prod uc ti on i n 1 d ay United States China Comp ute rs 60 4 or Cars 4 20 Illustrate the nations’ production possibilities Start with these initial production points: U.S. 3 0 co mputers/2 cars C hina 2 co mputers/1 0 cars 4  Prod uc ti on i n 1 d ay United States China Comp ute rs 60 4 or Cars 4 20 Let’s change Start Computers Cars production in the US: 30 computers US: 2 cars two countries: China: 2 computers China: 10 cars World: 32 computers World: 12 cars U.S. changes production from 30 computers/2 cars to: 45 computers/1 car Computers Cars China changes production US: 45 computers US: 1 car from 2 computers/10 cars to: China: 1 computer China: 15 cars 1 computer/15 cars World: 46 computers World: 16 cars 5  Prod uc ti on i n 1 d ay United States China Comp ute rs 60 4 or Cars 4 20 Trade 8 computers for 2 cars and see the GAI NS F R OM T R ADE : U.S. 3 7 co mputers/3 cars (versus 3 0 computers/ 2 cars) C hina 9 co mputers/1 3 cars (versus 2 computers/ 1 0 cars) 6 Comparative advantage: when a nation can produce the good at a lower opportunity cost than its trading partner. Prod uc ti on i n 1 d ay United States China Comp ute rs 60 4 OR Cars 40 20 ◦ N O T E: T h e U n ited S tates h as an abso lu te advan tage in both com puters and cars. 7  Prod uc ti on i n 1 d ay United States China Comp ute rs 60 4 OR Cars 40 20 I l l u s trate th es e produ cti on pos s i bi l i ti es S t a r t wi t h i n i t i a l p r o d u c t i o n p o i n t s : U.S. 5 4 co mputers/4 cars C hina 2 co mputers/1 0 cars 8  Prod uc ti on i n 1 d ay U.S. 5 4 computers / 4 cars United States China Chi na 2 computers / 1 0 Comp ute rs 60 4 cars OR Let’s change Cars 40 20 production in the two countries: Computers US: 54 computers Cars US: 4 cars U.S. changes production China: 2 computers China: 10 cars fro m 54 co m puters/4 cars World: 56 computers World: 14 cars to 60 computers/0 cars Computers Cars C h in a c h an ges pro du c tio n US: 60 computers US: 0 cars fro m 2 co m pu ters/1 0 cars China: 0 computers China: 20 cars to 0 computers/20 cars World: 60 computers World: 20 cars 9 U.S. 5 4 computers / 4 cars Prod uc ti on i n 1 d ay Chi na 2 computers / 1 0 United States China cars Comp ute rs 60 4 OR Cars 40 20 U.S. 6 0 computers / 0 cars Chi na 0 computers / 2 0 cars Trade 4 US co m puters fo r C hinese 8 cars and again see the G A IN S FRO M TRA D E: U.S. 5 6 co mputers/8 cars (versus 5 4 computers/ 4 cars) C hina 4 co mputers/1 2 cars (versus 2 computers/ 1 0 cars) 10  Prod uc ti on i n 1 d ay United States China Comp ute rs 60 4 OR Cars 40 20 In China, what is the opportunity cost—what is given up—to produce a computer? A car? – C o mputer: (1 /4 ) × 2 0 = 5.0 cars per co mputer – C ar: (1 /2 0 ) × 4 = 0.20 computers per car In the United States, what is the opportunity cost of a computer? A car? – Computer: (1/60) × 40 = 0.67 car per computer – C ar: (1 /4 0 ) × 60 = 1.50 computers per car 11  Bottom line on opportunity cost, comparative advantage, and trade: The country with the lowest opportunity cost of producing a good Has a comparative advantage in producing the good Exports the good 12  Demand and Supply Stupid Parrot Joke Notes Optional 13 Competitive Market De ma nd a nd De ma nd C ur v e ◦ Price ◦ Law of Demand – A rise in the price of the good decreases the quantity demanded; a fall in the price of the good increases the quantity demanded. 14 Ot he r F a c t o r s Income ◦ Normal good: An increase in income increases the demand for a normal good. ◦ Inferior good: A decrease in income increases the demand for an inferior good. 15 S hi f t i n De ma nd C ur v e v e r s us Mo v e me nt Al o ng De ma nd C ur v e Change in demand Change in the quantity demanded 16 F a c t o r s T ha t S hi f t t he De ma nd C ur v e Prices of Related Goods ◦ Substitutes (in consumption): A rise in the price of a substitute increases the demand for the good. ◦ Complements (in consumption): A rise in the price of a complement decreases the demand for the good. Number of Demanders ◦ An increase in the number of demanders increases the demand for the good; a decrease in the number decreases the demand for the good. 17 F a c t o r s T ha t S hi f t t he De ma nd C ur v e Preferences ◦ Liking a product more increases the demand for the good; liking a product less decreases the demand for the good. Expected future price ◦ Higher expected future price increases the current demand for the good; lower future expected price decreases the current demand for the good. 18 Summary: 5 Factors That Shift the Demand Curve Income ◦ Normal Good ◦ Inferior Good Prices of Related Goods ◦ Substitutes (in consumption) ◦ Complements (in consumption) Number of Demanders Preferences Expected future price 19 S uppl y a nd S uppl y Cur ve Price ◦ Law of Supply A rise in the price of the good increases the quantity supplied; a fall in the price of the good decreases the quantity supplied. 20 Supply and Supply Curve Ot he r F a c t o r s ◦ Cost: A d ecrease in cost increases the sup p ly. 21 S hi f t i n S up p l y C ur v e v e r s us Mo v e me nt Al o ng S uppl y Cur ve Change in supply Change in the quantity supplied 22 F a c t o r s T ha t S hi f t t he S uppl y Cur v e Technology ◦ Advance in technology increases the supply of the good. N umber of suppliers ◦ Increase in the number of suppliers increases the supply of the good; decrease in number of suppliers decreases the supply of the good. State of nature ◦ Good state of nature increases the supply of the affected goods; bad state of nature decreases the supply of the affected goods. 23 Ot he r F a c t o r s Expected future price ◦ Higher expected future price decreases the current supply of the good; lower expected future price increases the current supply of the good. 24 Summary: 5 Factors That Shift the Supply Curve Cost Technology Number of suppliers State of nature Expected future price 25 Equi l i br i um 26  AS I DE: Do n’ t t a k e no t e s! The 4-step method 1. Draw a demand and supply diagram 2. Identify which curve shifts 3. Determine the direction of the shift 4. Draw the new curve OK, no w ba c k t o T AKI NG NOT ES ! 27 S ur pl use s } C o ns ume r S ur p l us : The difference between the maximum price a consumer is willing to pay and the price actually paid, summed over the quantity consumed. 28 S ur pl use s } P r oduc e r S ur pl us: The difference between the price a producer actually received and the minimum price the producer is willing to charge, summed over the quantity produced. 29 S ur pl use s Total Surplus 30  Exports ◦ Consumers W ors e off; con s u m er s u rp lu s d ecrea s es ◦ Producers Better off; p r od u cer s u r p lu s in cr ea s es ◦ Society Better off; tota l s u r p lu s in cr ea s es 31  I mp o r t s ◦ C onsum ers Better off; con s u m er s u r p lu s in cr ea s es ◦ Pro d ucers W ors e off; p rod u cer s u rp lu s d ecrea s es ◦ So cie ty Better off; tota l s u r p lu s in cr ea s es 32  Import s ◦ A symmetries – Gains fro m trade are no t equally distributed no r equally visible – Import loss is highly visible – Impo rt gain is literally invisible 33 Balance of trade deficit 2016: $502 b illion 2019: $617 b illion 2023: $773 b illion 34 } Type s of Pr ot e ct i on ◦ Tariff: Ta x im p osed on a n im p orted good ◦ Quota: Q u a n tita tive lim it on th e q u a n tity of a good th a t m a y b e im p orted. (A “V olu n ta ry Exp ort Restra in t” or “V ER” is a q u ota in wh ich th e exp or tin g cou n tr y “volu n ta r ily ” a gr ees to lim it th e q u a n tity of its exp or ts.) ◦ Other: H ea lth a n d s a fety req u irem en ts ; tech n ica l s ta n d a rd s ; costly cu stom s p roced u res; etc. 35 Balance of trade deficit and tariffs Big impact from tariffs? Balance of trade deficit Any impact from tariffs? 2016: $502 b illion 2019: $617 b illion 2023: $773 b illion 36  2023Services 2016 Goods and Goods and Services U.S. Imports: $480BU.S. Imports: $448B U.S. Exports: $169BU.S. Exports: $195B U.S. Deficit: $311BU.S. Deficit: $253B 2023 Goods: 2016 Goods: U.S. Imports: $427B U.S. Imports: $463B U.S. Exports: $148B U.S. Exports: $116B U.S. Deficit: $279B U.S. Deficit: $347B 2023 Services: 2016 Services: U.S. Imports: $20B U.S. Imports: $17B U.S. Exports: $46B U.S. Exports: $53B U.S. Surplus: $26B U.S. Surplus: $36B Why an impact here but not in total? 37  China Vietnam Goods and Services Goods and Services U.S. Imports: $480B U.S. Imports: $43B U.S. Exports: $169B 2016 U.S. Exports: $12B U.S. Deficit: $311B U.S. Deficit: $31B Goods and Services Goods and Services U.S. Imports: $448B U.S. Imports: $116B U.S. Exports: $195B 2023 U.S. Exports: $13B U.S. Deficit: $253B U.S. Deficit: $103B 38 Ef f ect of a ta r i f f : 39 } T a r i f f s umma r y : ◦ Consumers Worse off; consumer surplus decreases ◦ Producers Better off; producer surplus increases ◦ Government Better off; gains revenue ◦ Society Worse off; total surplus decreases ◦ A symmetry (again) 40 F r i e d ma n a nd a n AF L / C I O U ni o n o f f i c i a l http://www.youtube.com/watch?v=zk3ruapRQZk } F r i e d ma n a l s o t a l k e d a b o ut t w o o t he r a f f e c t e d ma r k e t s : ◦ O ther domestic industries Worse off ◦ O ther exporting industries Worse off ◦ A symmetry (again) 41  Mi l t o n F r i e d ma n i n 1 9 7 8 https://www.youtube.com/watch?v=j0pl_FXt0eM P r e s i d e n t T r u mp , 2 0 1 8 https://www.youtube.com/watch?v=fE1aWSpsDmg Effects, 2019 https://www.youtube.com/watch?v=Eky60iHXfOM&ab_chan nel=CNBC P r e side n t B ide n , 2 0 2 4 https://www.yo utube.co m /watch?v=0 o uV jaH tPX g 42 Ef f e c t o f a Quo t a : 43 } Quota summary: ◦ Consumers Worse off; consumer surplus decreases ◦ Producers Better off; producer surplus increases ◦ Someone Better off; gains quota rent ◦ Society Worse off; total surplus decreases 44 Compete with Low-Cost Labor (aka Save Jobs) ◦ Protection is necessary to enable the industry to compete with low-cost foreign labor. By protecting the industry, jobs are saved. ◦ Labor is low-cost when it is low-productive. ◦ The cost of saving jobs is incredibly high. 45 Infant Industry Argument ◦ The industry needs to be protected when it is starting because its costs are high. As time passes, the industry’s costs fall so that it has a competitive advantage against other nations’ mature industries. ◦ The problem is that if the industry will successfully be able to compete against foreign firms, then private entrepreneurs will see a profit opportunity and fund the firms. Protection is not necessary. ◦ If the industry cannot successfully compete, then entrepreneurs will not fund the firms. Once again protection is not necessary. 46 N a t i o na l S e c ur i t y Ar g ume nt ◦ Th e in d u stry n eed s to b e p rotected b eca u se it is n ecessa ry to n a tion a l secu rity. ◦ Th er e is m erit in th is a rgu m en t b u t for a lim ited n u m b er of in d u stries. ◦ Th is a rgu m en t is u sed to excess. 47 Hua we i ◦ H u a wei is a h u ge, C h in es e p rod u cer of telecom eq u ip m en t, in clu d in g 5G eq u ip m en t. ◦ Th ere is con cern in th e Un ited Sta tes th a t H u a wei eq u ip m en t ca n b e u s ed to s p y u p on com m u n ica tion s. ◦ I have a “Case Study” of Huawei but … 48 R e t a l i a t i o n Ar g ume nt ◦ Pro tectio n is justified as retaliatio n fo r unfair trade policies. ◦ The basic claim here is that if another country pursues “unfair trade po licies,” such as a tariff, then im po sing pro tectio n can be used to fo rce the other country to negotiate. ◦ This assertio n m ight be justifiable if it wo rks. B ut whether it works or not seems hard to determine. ◦ There is the po tential fo r gain but that po tential must be balanced against the certainty of losses. 49 } T a r i f f s umma r y : ◦ Consumers Worse off; consumer surplus decreases ◦ Producers Better off; producer surplus increases ◦ Government Better off; gains revenue ◦ Society Worse off; total surplus decreases 50 } Quota summary: ◦ Consumers Worse off; consumer surplus decreases ◦ Producers Better off; producer surplus increases ◦ Importers Better off; gain quota rent ◦ Society Worse off; total surplus decreases 51 Sugar ◦ Tariff Rate Quota limits imports to about 20% of total U.S. production ◦ (The “tariff rate quota” allows some sugar in at a low rate but for amounts exceeding the limit, the tariff rises to 150% of the price of sugar) ◦ https://www.youtube.com/watch?v=uHAxpvkLNKQ – Collin Peterson Chair of Agricultural Committee $63,500 – Kat Cammack Member Agricultural Committee $39,550 – Frank Lucas Member Agricultural Committee $34,250 – Sanford Bishop Member Agricultural Committee $34,000 ◦ https://www.youtube.com/watch?v=gYTRUL8aDfg&t=8s 52 Sugar } What are the market impacts of this protection? ◦ U.S. price of raw sugar in 2023: 41¢ per pound ◦ World price of raw sugar in 2020: 24¢ per pound 53  Sugar—who gains? Domino Sugar C&H Sugar Florida Crystals Redpath Sugar Alfonso Fanjul and Jose (Pepe) Fanjul American Sugar Refining 54 } Wha t a r e t he i mp a c t s i n o ur mo d e l o f a t a r i f f ? ◦ C o n su m er su rplu s: $3.3 billion - $5.4 billion lost ◦ Pro du cer su rplu s: $0.6 billion - $3.5 billion gain ◦ D eadw eigh t lo ss: $2.3 billion (averaging the above estimates) } Wha t a r e t he “ p r a c t i c a l ” i mp a c t s ? ◦ Jo bs saved: 3,600 ◦ C o st per jo b to c o n su m ers: $1,208,000 ◦ C o st per jo b to so c iety : $639,000 ◦ A verage w age: $50,000 55 Washing machines Prices rise by about 10% Jobs saved: 1,800 Cost per job to consumers: $800,000 56 Aggregate Effects of Tariffs: Percentage of traded products targeted: 12.7% Average U.S. tariff before trade war on targeted products: 2.6% Average U.S. tariff after trade war on targeted products: 16.6% Losses to U.S. consumers and firms that buy imports: ─$51.0B Gains to U.S. import-competing firms and tariff revenue: $43.8B Net effect: ─$7.2B 57 1 What is macroeconomics? Goods Market Loanable funds Labor (input) Market (credit) Market 2 Business cycle: The normal fluctuations of production in the economy. ◦ Expansion ◦ Peak ◦ Recession ◦ Trough Simplify by ignoring economic growth. We start by studying how we measure production as well as prices. 3  GDP Gross domestic product (GDP) is the market value of all final goods and services produced within the United States during a year. GDP = ∑ Pi × Qi “market value” “final goods and services” “produced within the United States” “during a year” GDP was $28.3 trillion in 2024-I (GDP was $26.5 trillion in 2023-I) 4  Consumption (C ) Personal Consumption Expenditure Goods and services purchased by households for their consumption; this measure excludes housing. Consumption was $19.2 trillion in 2024-I or 67.8% of GDP (Consumption was $18.1 trillion, 68.3% of GDP in 2023-I) Investment (I ) Gross Private Domestic Investment Durable capital goods purchased (generally) by businesses to help produce goods and services; housing is included in investment and is about 18% or 19% of investment. Investment was $5.0 trillion in 2024-I or 17.7% of GDP (Investment was $4.6 trillion, 17.4% of GDP in 2023-I) 5  Government purchases (G ) Government Consumption Expenditure and Gross Investment Goods and services purchased by all levels of government; federal government purchases is about 40% of this expenditure. Government purchases were $4.9 trillion in 2024-I or 17.3% of GDP (Government purchases were $4.6 trillion, 17.4% of GDP in 2023-I) Net exports (NX ) Net Exports of Goods and Services The value of exports of U.S.-produced goods and services minus the value of U.S. imports – Exports were $3.1 trillion in 2024-I or 11.0% of GDP – Imports were $3.9 trillion in 2024-I or 13.8% of GDP Net exports were −$0.8 trillion in 2024-I or −2.8% of GDP (Net exports were ─$0.9 trillion, ─3.3% of GDP in 2023-I) 6 The net result is GDP = C + I + G + NX. 7  GDP = ∑ Pi × Qi so GDP can change because: Prices change Quantities change We want to split these changes apart …we’ll start with prices. 8 CPI: A monthly measure of the average of prices paid by urban consumers for a fixed market basket of consumer goods. GDP Deflator: An average of current prices of goods and services in GDP expressed as a percentage of base-year prices. PCE Deflator: An average of current prices of goods and services in consumption expressed as a percentage of base-year prices. Core Price Level: The price level excluding prices of energy and food. 9 Inflation Rate: The growth rate of the price level. Inf = [(Pt - P t-1)/(P t-1)] × 100 Year Price Level 2023 200 [(220 – 200)/(200) × 100 = 10% 2024 220 2025 242 [(242 – 220)/(220) × 100 = 10% Federal Reserve: The Fed looks at the PCE deflator inflation rate 10 11 12 Real GDP: Real Gross Domestic Product (GDP) is the quantity of all final goods and services produced within the United States during a year. } Real GDP was $22.7 trillion in 2024-I (Nominal GDP) (Real GDP) = (GDP price deflator) 13  2023 2024 Price Quantity Price Quantity Beef $6 100 $8 120 Chicken $5 80 $8 60 – Nominal GDP 2023: ($6 × 100) + ($5 × 80) = $1,000 – Nominal GDP 20234 ($8 × 120) + ($8 × 60) = $1,440 – Nominal GDP growth rate: 44% } Old Method: Make 2023 the base year. Base year prices are used to value the quantities. Use base year prices to value 2023 quantities – Real GDP 2023: ($6 × 100) + ($5 × 80) = $1,000 Use base year prices to value 2024 quantities – Real GDP 2024: ($6 × 120) + ($5 × 60) = $1,020 – Real GDP growth rate: 2% 14  2023 2024 Price Quantity Price Quantity Beef $6 100 $8 120 Chicken $5 80 $8 60 } New Method: (Make 2023 the base year) Step 1: Step 2: Calculate GDP in both years Calculate GDP in both years using 2023 prices1%and then using 2024 prices and then calculate growth rate: calculate growth rate: Step GDP 2023 $1,000 4: GDP 2023 $1,440 GDP 2024 $1,020 GDP 2024 $1,440 Apply this growth rate to the 4previous year’s real GDP. Growth rate: 0% Growth rate: 2% ($1,000)×(1.01)=$1,010 Step 3: Average the two growth rates Growth rate: 15 16  (Nominal GDP) (Real GDP) = (GDP Price Deflator) (Nominal GDP) (GDP Price Deflator) = (Real GDP) Nominal GDP 2024: $1,440 Real GDP 2024: $1,010 $1,440 Typically, the price level is GDP price deflator: = 1.42 $1,010 made into an index number by multiplying it by 100: P = 1.42 × 100 = 142 17 18 Employed worker: ◦ Did any work for pay in survey week ◦ Did not work due to illness, vacation, maternity or paternity leave, on strike ◦ Worked 15 or more hours on family farm or business Unemployed worker: ◦ Without a job ◦ Actively looked for work in the past 4 weeks ◦ Currently available for work Labor force = Employed + Unemployed workers 19 Unemployment rate Unemployed people are those who are without jobs and have actively looked for work within the past four weeks. 20 Labor Force Participation Rate The percentage of the population [16 years and older] that is either employed or unemployed (that is, either working or actively seeking work). 21 Types of Unemployment: 1. Structural: Workers whose skills do not match job vacancies. 2. Frictional: The normal ebb and flow of unemployed workers searching for jobs. 3. Cyclical: Unemployment due to the business cycle. Natural Unemployment Natural unemployment equals the sum of structural plus frictional unemployment. 22 Natural Unemployment Natural unemployment equals the sum of structural plus frictional unemployment. Full employment When the economy is at the natural rate of unemployment, there is full employment of labor. 23 Natural Unemployment Rate 24 Potential GDP: What real GDP equals when the economy is at full employment. 25 Potential GDP and Natural Rate 26 27 Remember … Goods Market Loanable funds Labor (input) Market (credit) Market 28 Labor demand Change in labor demand Demand increases when: Production (GDP) and price level (P) increase Technology advances 29 Labor supply 30  Two changes in labor supply Supply increases when: Supply decreases when: Labor force grows Price level rises Income taxes decrease 31 If these are the “permanent” labor demand and labor supply curves, then 135 million workers is Full Employment 32 Suppose the government cuts income tax rates. Looking at the labor market in isolation, the cut in income tax rates increases employment and lowers the (pre-tax) wage. (It raises the post-tax wage.) Full Employment increases. 33 Suppose Price Level, P, increases: Short Run Long Run RESULT: P Employment RESULT: P Employment But what about the effect on the supply of labor? 34 Two simplifications: Remember that we ignore economic growth Initially we also simplify by ignoring net exports For the goods market we will use an (aggregate) demand and supply model. – The first step is an aggregate demand curve 35 Aggregate demand is the total demand Consumption demand (C ) Investment demand (I ) Government spending (G ) AD = C + I + G Aggregate demand curve 36 Shift versus Movement Along Aggregate Demand curve Shift of Aggregate Demand Curve What Causes a Shift? Change in taxes (affects consumption and/or investment) Change in interest rate (affects investment and some consumption) Change in government purchases (affects government) HINT: These are important! 37 Aggregate supply is the total supply of goods and services Short run differs from the long run Assume in the short run, costs (wages) do not respond to a change in prices Short-run aggregate supply Start with the price level equal to 106 and real GDP equal to potential GDP of $22 trillion. Prices rise to 110. Firms hire unemployed workers and wages do not change much. Employment increases, unemployment falls and real GDP increases to $24 trillion. Consequently, we have an upward sloping short-run aggregate supply curve, SRAS. 38  Shift in Aggregate Supply Suppose the population grows or the labor force participation rate increases (full) employment increases And the aggregate supply curve shifts to the right This is economic These shifts would also growth! occur if the capital stock increases or technology advances. 39 Shift in Short-Run Aggregate Supply Suppose wage rates rise Short-run aggregate supply shifts 40 In the short run, we assume wages and other costs do not adjust to a change in the price level. In the long run, wages and other costs adjust (fully) to a change in the price level. And this adjustment affects the aggregate supply curve. Short-run impactfrom Long-run impact from Long-run Short-runimpact impactfrom fromaa a higher price level (AS) (L) higher price level (AS) (L) RESULT: P LD LS L W SRAS LONG RUN 41 42  Increase in aggregate demand Goods Market Labor Market In the short run, GDP and employment both increase But this is before wages fully adjust to the higher price level After this adjustment, there is no change in GDP or employment 43 44  3 Policy Goals 1. Smooth the business cycle 2. Stay close to potential GDP 3. Keep inflation rate low 45  Types of Policy Fiscal Policy Changes in government purchases of goods and services, transfer payments, and/or taxes. Government budget constraint plays an important role: G = Tax + Deficit Monetary policy Changes in the interest rate engineered by the Federal Reserve. 46 Very quick introduction: G ↑ means Aggregate demand increases But G↑ also means the government budget deficit increases In turn that means we need to explore the loanable funds market … 47 Remember … Goods Market Loanable funds Labor (input) Market (credit) Market 48 The markets where borrowers borrow and savers save, that is, lending takes place. – Bond market – Stock market – Mortgage market – Etc … We “collapse” these markets into one market, and so we need to look at demand and supply in this market. 49 Demanders: Households Firms Government (deficit) Foreigners 50  Suppliers: Households* Government (surplus) Foreigners * Via financial intermediaries, such as banks 51 Equilibrium 52 1. G ↑ (Holding taxes constant => Budget deficit rises) 2. Aggregate demand increases: Now we can determine the effect of the budget deficit 53  3. Loanable Funds market Increase in demand for loanable funds due to a larger budget deficit: A $2 trillion deficit Crowding out—the higher interest rate will reduce Investment (and some Consumption). 54 4. Effect from loanable funds market 55 Long-Run Regardless of the effect from the loanable funds market, in the long run we are back to where we were before...at least GDP (and employment) is. The issue is that the long-run incentives to work (or invest) do not change. 56 Income taxes affect incentives to consume, save, and invest. work. 57 1. Taxes↓ (so the government budget deficit increases) 2. The AD curve shifts right. Loanable funds effect: The shift is partially offset by a higher interest rate. 58 1. Taxes↓ People increase their supply of labor because they now keep more of their income. 2. The SRAS curve shifts right. 59 1. Taxes↓ (so the government budget deficit increases) 2. The AD curve shifts right. Loanable funds effect: The shift is partially offset by a higher interest rate. 2. AND the SAS curve shifts right. 3. Long-run effect differs. Why? Incentives matter. https://www.youtube.com/watch?v=O77G0SaJv5M 60 Monetary policy Changes in the interest rate engineered by the Federal Reserve. Also playing a role is the banking system commercial banks savings and loans credit unions and, more generally, other financial institutions insurance companies mortgage companies etc 61  Banking System Balance Sheet (July 2024) Assets Liabilities and net worth (billions) (billions) Government securities $5,172 Deposits $17,246 Loans 12,110 Borrowings 2,386 Cash assets 3,284 Other liabilities and net worth 1,047 Other assets 2,286 Net worth 2,173 Total assets 22,852 Total liabilities and net worth 22,852 “Cash Assets” are largely reserves held at the Federal Reserve The largest assets are government securities and loans. The largest liability is deposits. 62 The Fed is a “quasi-public/quasi-private” organization. Its organizational structure is like a pyramid: Base: 3,000 member commercial banks Middle: 12 Federal Reserve Banks Top: 7 members of the Board of Governors The Federal Open Market Committee (FOMC) is the group within the Fed that is responsible for setting the nation’s monetary policy. The FOMC is comprised of the 7 Board of Governors, the President of the NY Fed, and on a rotating basis, 4 Presidents of the other regional Fed banks. 63 The current Chair of the Board of Governors is Jerome Powell https://www.youtube.com/watch?v=s07VmIFPpTc https://www.youtube.com/watch?v=b2_4NlSnmus&ab_ channel=CNNBusinessCNNBusinessVerified 64  Assets Liabilities and net worth (billions) (billions) Gold $11 Federal Reserve notes $1,739 Government securities 2,110 Deposits at Fed (reserves) 1,537 Federal agency securities 2 U.S. Treasury 223 Loans to “banks” 0 Foreign official 5 Federal Reserve Balance Sheet Mortgage backed securities 1,755 Other liabilities and net 391 (July 2019) worth Other assets 12 Total assets 3,895 Total 3,895 Assets Liabilities and net worth (billions) (billions) Gold $11 Federal Reserve notes $2,353 Government securities 4,466 Deposits at Fed (reserves) 3,408 Federal agency securities 2 U.S. Treasury 0 Loans (largely) to (failed) 117 Foreign official 377 Federal Reserve Balance Sheet “banks” (June 2024) Mortgage backed securities 2,354 Reverse repurchase 792 agreements Other assets 360 Other liabilities and net 380 worth Total assets 7,310 Total 7,310 Discount rate Interest rate paid on Reserve Balances (IORB) 65 Reverse Repurchase Agreement (Reverse Repo): The Fed sells securities to non-bank financial institutions BUT has an agreement to buy them back the next day at a higher price. The companies pay for these securities using reserves. The higher price the financial institutions receive is effectively the interest rate, (ON RPP, for “Overnight Reverse Repurchase”). 66  Banks want to hold a certain desired amount of their liabilities as liquid reserves. Assets that are the most liquid reserves are deposits at the Federal Reserve and currency in the bank’s vault. The key market is the federal funds market. The federal funds market is where banks and others borrow and lend reserves (most lending is done by non-bank holders of reserves, eg, money market funds) for extremely short loans, typically overnight. The interest rate on these loans is the federal funds rate. 67 Monetary policy works by changing the interest rate. The federal funds rate is the interest rate the Fed can closely influence: 68 The Fed has a two major methods it uses to change the interest rate: The “classic” method is by using open market operations (the purchase or sale of government securities). The “new method” is by changing the interest rate paid on reserve balances (IORB) and the discount rate, the interest rate the Fed charges banks for loans. 69 Federal funds market: 70 By reducing the supply of reserves, the Fed can raise the federal funds rate: 71 Fed’s actions: Bank Federal Reserve Assets Liabilities Assets Liabilities Reserves $100 DD $1,000 Gov. Securities $10,000 Reserves $2,000 Gov. Securities $400 Owed on FF $0 FRN $8,000 Loans $600 NW $100 Total $10,000 Total $10,000 Total $1,100 Total $1,100 Total reserves: $100 Now the Fed sells $50 of government Desired reserves: $100 securities to the bank, which are paid Excess reserves: $0 for using the bank’s reserves Bank Federal Reserve Assets Liabilities Assets Liabilities Reserves $50 DD $1,000 Gov. Securities $9,950 Reserves $1,950 Gov. Securities $450 Owed on FF $0 FRN $8,000 Loans $600 NW $100 Total Total $9,950 $9,950 Total $1,100 Total $1,100 Total reserves: $50 The Fed’s action decreases Desired reserves: $100 the supply of reserves Excess reserves: −$50 72 Using an open market operation, the Fed raises the federal funds rate by selling a government security to a bank and accepting payment in the form of some of the bank’s reserves: 73  Next, the bank borrows the necessary reserves Bank Federal Reserve Assets Liabilities Assets Liabilities Reserves $100 DD $1,000 Gov. Securities $9,950 Reserves $1,950 Gov. Securities $450 Owed on FF $50 FRN $8,000 Loans $600 NW $100 Total $9,950 Total $9,950 Total $1,150 Total $1,150 Total reserves: $100 Eventually the bank calls in or does not roll Desired reserves: $100 over a $50 loan to a firm and repays its FF debt Excess reserves: $0 Bank Federal Reserve Assets Liabilities Assets Liabilities Reserves $100 DD $1,000 Gov. Securities $9,950 Reserves $1,950 Gov. Securities $450 Owed on FF $0 FRN $8,000 Loans $550 NW $100 Total $9,950 Total $9,950 Total $1,100 Total $1,100 Total reserves: $100 Desired reserves: $100 Excess reserves: $0 74 Loanable funds market: From here Investment (and Consumption) decrease, thereby affecting GDP. 75 Summary of Fed’s open market operations: Buy security Pay with reserves Increase reserves Lower the federal funds rate Sell security Accept reserves as payment Decrease reserves Raise the federal funds rate 76 Fed’s actions: Bank Federal Reserve Assets Liabilities Assets Liabilities Reserves $300 DD $1,000 Gov. Securities $10,000 Reserves $2,000 Gov. Securities $300 Owed on FF $0 FRN $8,000 Loans $500 NW $100 Total $10,000 Total $10,000 Total $1,100 Total $1,100 Total reserves: $300 Now the Fed sells $50 of government Desired reserves: $100 securities to the bank, which again Excess reserves: $200 pays for them using its reserves Bank Federal Reserve Assets Liabilities Assets Liabilities Reserves $250 DD $1,000 Gov. Securities $9,950 Reserves $1,950 Gov. Securities $350 Owed on FF $0 FRN $8,000 Loans $500 NW $100 Total Total $9,950 $9,950 Total $1,100 Total $1,100 Total reserves: $250 The Fed’s action decreases Desired reserves: $100 the supply of reserves Excess reserves: $150 But so what?? There are ample reserves 77 The effect in the Federal Funds market: 78 The “new” method uses two interest rates to change the Federal Funds interest rate: 1. Interest rate the Fed pays on reserves—if the Federal Funds rate is below this, the demand for reserves is essentially infinite. 2. Discount rate (interest rate the Fed charges for loans)—if the Fed Funds rate is above this, the demand for reserves is zero. Consequently, the demand curve for reserves has an odd appearance: 79 With this demand curve, the equilibrium is still the same as always, where the demand and supply curves interest. 80 Now when the Fed wants to change the interest rate, it changes the two interest rates: 81 The Fed changes the interest rate it pays for reserves. The initial interest rate paid for reserves is 1 percent, so the interest rate in the loanable funds market is 2 percent. The Fed raises the interest rate paid for reserves to 2.33 percent, so the interest rate in the loanable funds market rises to 3 percent.. 82 1. The Fed raises the interest rate. 2. Investment (also some consumption) decreases and therefore aggregate demand decreases. 83 3. Eventually wages and other costs fall. 84 AKA: Sit back and relax. 85 1. Social distancing and closing non-essential businesses. Aggregate supply decreases 86 2. Massive fall in income decreases consumption, which decreases aggregate demand. 3. Massive decrease in investment. Aggregate demand decreases The picture can't be displayed. 87  Three Massive Policies 1. CARES (Coronavirus Aid, Relief, and Economic Security) Act. (3-2020) $2.3 trillion dollars 2. Stimulus and Relief Package. (12-2020) $0.9 trillion dollars 3. The American Rescue Plan. (3-2021) $1.9 trillion dollars Goals: Increase consumption, investment, and even government purchases 88  Policies started in 3-2020 1. Federal funds rate cut to near 0% (3-2020) 2. Massive purchases of government securities and mortgage-backed securities (MBS) (3-2020) Goals: Increase consumption and investment by keeping the interest rate low and financial markets (particularly MBS market) stable 89 4. Effect of government policy. Aggregate demand increases Aggregate supply increases The price which means level rises … there is inflation. 90  INFLATION: Indicators of economic activity and employment have strengthened. … Inflation has risen, largely reflecting transitory factors. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. Oops …. 91  INFLATION: With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective … INTEREST RATE: support of these goals, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent and anticipates that ongoing increases in the target range will be appropriate. 92