ECON 3601 Lecture Notes - Lecture 2: Gross Domestic Product, Outsourcing, Offshoring

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viridiansardine386

10 Jun 2018

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Lecture 1:

Who Trades with Whom?

• More than 30% of world output is sold across national borders.

• The 5 largest trading partners with the U.S. in 2012 were Canada, China, Mexico, Japan,

and Germany.

• The largest 15 trading partners with the

U.S. accounted for 69% of the value of U.S. trade in 2012.

Size Matters: The Gravity Model

• 3 of the top 10 trading partners with the U.S.

in 2012 were also the 3 largest European economies: Germany, the United Kingdom,

and France.

• Why does the United States trade more with these European countries than with

others?

– These countries have the largest gross domestic product (GDP), the value of

goods and services

produced in an economy, in Europe.

– Eah Euopea outy’s shae of U.“. tade ith Euope is oughly eual to its

share of European GDP.

• The size of an economy is directly related to the volume of imports and exports.

– Larger economies produce more goods and services, so they have more to sell in

the export market.

– Larger economies generate more income from

the goods and services sold, so they are able to buy more imports.

• Trade between any two countries is larger, the larger is either country.

• The gravity model assumes that size and distance are important for trade in the

following way:

Tij = A x Yi x Yj /Dij

where

Tij is the value of trade between country i and country j

A is a constant

Yi the GDP of country I, Yj is the GDP of country j

Dij is the distance between country i and country j

• Or more generally

Tij = A x Yia x Yjb /Dijc

where a, b, and c are allowed to differ from 1.

Using the Gravity Model: Looking for Anomalies

• A gravity model fits the data on U.S. trade with European countries well but not

perfectly.

• The Netherlands, Belgium and Ireland trade much more with the United States than

predicted by a gravity model.

– Ireland has strong cultural affinity due to common language and history of

migration.

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Document Summary

U. s. accounted for 69% of the value of u. s. trade in 2012. These countries have the largest gross domestic product (gdp), the value of goods and services produced in an economy, in europe. Ea(cid:272)h eu(cid:396)opea(cid:374) (cid:272)ou(cid:374)t(cid:396)y"s sha(cid:396)e of u. t(cid:396)ade (cid:449)ith eu(cid:396)ope is (cid:396)oughly e(cid:395)ual to its share of european gdp: the size of an economy is directly related to the volume of imports and exports. Larger economies produce more goods and services, so they have more to sell in the export market. Tij = a x yi x yj /dij where. Tij is the value of trade between country i and country j. Yi the gdp of country i, yj is the gdp of country j. Dij is the distance between country i and country j: or more generally. Tij = a x yi where a, b, and c are allowed to differ from 1. Ireland has strong cultural affinity due to common language and history of migration.

Related Questions

1. Which of the following trading partners of the United States became its number one "trade problem" at the beginning of the 21^st century?

United Kingdom

Japan

Germany

Canada

China

2. Which of the following presents the correct picture of the outcome of increased world trade after the 1950s, contrary to Servan-Schreiber's prediction?

Third World countries have been excluded from this economic growth leading to stark imbalances in wealth.

The European Union has become the center of world trade, taking the position away from the United States.

The United States has continuously maintained the positive balance of trade it attained during the 1950s.

Economic power and potential has become more evenly distributed among the countries of the world.

SDRs and gold have lost their utility as the basic medium of financial exchange and most monetary statistics have started relating to the U.S. dollar.

3. The _____ of the balance-of-payments statement is most likely to record all merchandise exports, imports, and services plus unilateral transfers of funds.

current account

capital account

credit account

receivables account

reserves account

4. The Foreign Corrupt Practices Act (FCPA) was specifically addressed in the _____ section of the Omnibus Trade and Competitiveness act.

market access

export expansion

import relief

foreign exchange regulation

trade deficit

Mexico's automobile industry is booming. Bolstered by $19 billion in new investment from foreign carmakers, including Nissan, Honda, Volkswagen, and Mazda, vehicle production doubled between 2009 and 2014 to an estimated 3.2 million vehicles. This investment surge has transformed Mexico into the eighth-largest automaker in the world, and it's not over yet. In 2014 and 2015, Toyota, Mercedes-Benz, Hyundai-Kia, BMW, and Volkswagen all outlined plans to build new state-of-the-art factories in Mexico. Audi is also constructing a $1.3 billion factory that is slated for producing luxury sport-utility vehicles. The Audi factory is scheduled to open in 2016. Taken together, these new factories represent another $20 billion in investment that will push Mexico past Brazil and South Korea to become the sixth-largest car producer in the world by 2020 with an annual output of 4.7 million vehicles (for comparison, the U.S. industry makes some 11.5 million autos a year). The initial stimulus for the dramatic growth of the Mexican auto industry was the establishment of the North American Free Trade Agreement (NAFTA) in 1994. Prior to NAFTA, Mexico's auto industry was small and protected from foreign competition by high tariff barriers. Car prices in Mexico were two to three times higher than in the United States. Not only were cars in Mexico more expensive, exporting or importing cars and parts was also very tough. Shipments got delayed at the border and were difficult to move around because of poor infrastructure, which is a major problem in an industry in which tight logistics is critical. NAFTA removed most tariff and nontariff barriers to trade between Mexico, the United States, and Canada. This initially led to a flood of low-priced auto imports into Mexico from the United States, but it also gave auto manufacturers based in Mexico duty-free access to the large U.S. market next door. With labor costs in Mexico just a fraction of those in the United States, auto manufacturers now had to consider Mexico when planning new plants to serve the North American market. Mexico's shift to free trade didn't stop with NAFTA. Mexico spent much of the 2000s hammering out free trade deals with over 40 other countries, including the 28 states of the European Union, Japan, and Brazil. These deals give auto factories based in Mexico duty-free access to markets that contain 60 percent of the world's economic output, and they have helped transform Mexico into the fourth-largest auto exporter in the world. Eighty percent of the cars now produced in Mexico are exported to other countries, two-thirds of them to the United States. This unprecedented network of regional trade agreements has given Mexico an important edge when it comes to attracting new investment. For example, when BMW ships cars to Europe from its 20-year-old plant in South Carolina, it is hit with a 10 percent import duty. For a $50,000 car, that amounts to $5,000, which is a much bigger factor than differences in labor costs. A factory in Mexico can supply both the U.S. and the EU markets with duty-free automobiles. This was a major factor behind BMWs 2014 decision to build a new factory in central Mexico rather than the United States, far outweighing the $500 a car labor cost advantage that Mexico currently enjoys over the United States. The new BMW factory will supply the U.S. and EU markets, as well as Latin America. Indeed, because of differences in trade barriers, a car exported from the United States to Brazil costs 55 percent more than one exported from Mexico. As Mexico's auto industry has grown, auto-part suppliers have also followed manufacturers to Mexico. The large auto parts supplier Delphi, for example, has 30 factories in Mexico and generates revenues of $3 billion in the country. Employment at Delphi's facilities doubled to 24,000 between 2007 and 2014. Infrastructure has also improved dramatically, and customs clearance at the border is now quick and efficient. All of this bodes well for the future of the Mexican auto industry. However, not everyone is happy with what has happened. Some argue that growth in Mexico has come at the expense of factories in the United States, which has had a negative impact on employment growth in the U.S. auto industry. When BMW decided to build a factory in central Mexico, for example, it meant that it would not be expanding its South Carolina plant. The South Carolina plant will continue to operate, and no plants have been closed as a result of the growth of production in Mexico, but it is true that new plants are increasingly being located south of the border. Sources: Joann Muller, America's Car Capital Will Soon Be... Mexico, Forbes, July 20, 2014; Dudley Althaus and William Boston, Trade Pacts Give Mexico an Edge,â The Wall Street Journal, March 18, 2015; Sonari Glinton, How NAFTA Drove the Auto Industry South, National Public Radio, December 8, 2013; Serena Maria Daniels, Twenty Years after NAFTA, a Mini Detroit Rises in Mexico,â Bridge, September 25, 2014. CASE DISCUSSION QUESTIONS

1. What was the initial impact of NAFTA on the U.S. and Mexican automobile markets? Who benefited most from this?

2. How did the impact of NAFTA start to change location decisions by automobile manufacturers over the years? How did this start to impact automobile production in Mexico and the United States?

3. Mexico has been very proactive in signing regional free trade deals in addition to NAFTA. How has this strategy impacted automobile consumers and producers in Mexico? How has it impacted automobile consumers and producers in the United States?

4. What lessons can United States policymakers draw from the growing success of the Mexican automobile industry that can be applied to future free trade deals, such as the deal currently being negotiated between the United States and the European Union?

periwinkledeer489

Please read the passage and answer the questions below.

During the first half of the 2000s, the Japanese yen was relatively weak against the U.S. dollar. This was a boon for Japanâs export-led economy. On January 1, 2008, it took 122 yen to buy one U.S. dollar. For the next four years, the yen strengthened relentlessly against the dollar, hitting a record high of Â¥75.31 to the dollar on October 31, 2011. The reasons for the rise of the yen were complex and had little to do with the strength of the Japanese economy because there has been very little of that in evidence. The weakness of the yen during the early to mid-2000s was due to the so-called carry trade. This financial strategy involved borrowing in Japanese yen, where interest rates were close to zero, and investing the loans in higher-yielding assets, typically U.S. Treasury bills, which carried interest rates 3 to 4 percentage points greater. Investors made profits from the interest rate differential. At its peak, financial institutions had more than a trillion dollars invested in the carry trade. Because the strategy involved selling borrowed yen to purchase dollar-denominated assets, it drove the value of the yen lower. The interest rate differential existed because the Japanese economy was weak, prices were falling, and the Bank of Japan had been lowering interest rates in an attempt to boost growth and get Japan out of a dangerous deflationary cycle. When the global financial crisis hit in 2008 and 2009, the Federal Reserve in the United States responded by injecting liquidity into battered financial markets, effectively lowering U.S. interest rates on U.S. Treasury bonds. As these fell, the interest rate differential between Japanese and U.S. assets narrowed sharply, and the carry trade became unprofitable. Financial institutions unwound their positions, selling dollar-denominated assets, and buying yen to pay back their original loans. The increased demand drove up the value of the yen. For Japanese exporters, the 40 percent increase in the value of the yen against the dollar (and the euro) between early 2008 and 2012 was a painful experience. A strong yen hurts the price competitiveness of Japanese exports and reduces the value of profits earned overseas when translated back into yen. Take Toyota as an example: In February 2012, the company stated that its profit for the year ending March 31, 2012, would be about Â¥200 billion, 51 percent lower than in the prior year. Toyota makes nearly half of the cars it sells globally at its Japanese plants, so it has been particularly hard hit by a rise in the value of the yen. In late 2012, things started to change when the pro-business Liberal Democratic Party won national elections and Shinzo Abe was appointed prime minister. Abe had campaigned on a platform that included taking actions to weaken the value of the yen to help Japanâs exporters. Even before the election, Japanâs central bank had accelerated purchases of government securities, thereby expanding the money supply, and had agreed to a higher inflation target. Under Abeâs leadership, this policy had explicit government support. One consequence of the policy was to reduce the value of the yen against other currencies. Indeed, between October 2012 and December 2013, the yen lost more than 25 percent of its value against the U.S. dollar. The yen was trading at Â¥104 to the U.S. dollar in late December 2013. While this helped Japanâs exporters, the policy was criticized by other major industrial nations as a unilateral action that came dangerously close to precipitating a currency war.

1. Who in Japan benefits from the devaluation of the yen? Who does this hurt in Japan?

2. What does this case teach you about the way foreign exchange markets work?

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ECON 3601 Lecture Notes - Lecture 2: Gross Domestic Product, Outsourcing, Offshoring

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