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ECONOMICS 3150N

Winter 2013Professor Lazar

Office: N205J, Schulichflazar@yorku.ca

736-5068

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Lecture 1: January 10Ch. 1, 13

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Course Requirements

• Three tests

• February 7; March 14; April exam period

• 30%; 30%; 40%

• Format: 3 questions of 6 – short essays

• Open book: No cell phones, no wireless-enabled communication devices

• No excuses for missing first two tests

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Other Ground Rules

• No taping of lectures

• No cell phones in class – no texting

• If you need to talk to anyone, leave classroom quietly and discreetly

• Responsible for all chapters in text

• Listen before you write

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Office Hours

• Thursdays: 14:00-17:00

• N205J, Schulich

• Phone: 736-5068

• Email: flazar@yorku.ca

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Introduction

• Does anyone know what the “equilibrium” value is for the Canadian dollar? Has the Canadian dollar become a petro or commodity currency?

• Does economic theory have much to tell us about exchange rates, trade patterns and capital flows?

• Can economic theory explain the near meltdown of the global financial system?

• Should Greece leave the Eurozone, or should the country be expelled? What about Quebec and Canada?

• Will the Eurozone survive? Should it?• What is excessive risk?

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Introduction

• Is the annual US current account deficit (approximately US$560 billion) a problem?

• Should China allow its currency to appreciate?• Can economic theory explain the creation and location of

companies such as Apple, Bombardier, Embraer, Samsung, Siemens, Microsoft, Google, America Movil, Apotex, Wipro, ArcelorMittal, Whampoa, Flextronics, H&M, Ikea, McDonalds, Nestle, Pfizer, BHP-Billiton, Tata, Hyundai, etc.?

• Will the Doha round of the WTO multilateral negotiations ever end?

• Does Canada play “fair” in international trade?• Is globalization good? Were the Occupiers right?

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Introduction• Is there any hope for Africa?

– Of the 24 countries with GDP per capita of less than $750 per year, 21 are in Africa

– Dem. Rep. of Congo at the bottom with GDP per capita of $231• Do free trade agreements jeopardize social policies?

– Should there be minimal standards in free trade agreements– Are regional free trade agreements legal under the GATT?

• Genetically modified foods and free trade – EU vs. the US• Is the Canadian economy de-coupled from that of the US?

Is anyone’s?– Will China drive world economic growth?

– Will China follow the same path as Japan?

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Countries with GDP per capita < US$750 (2011)

1. Dem. Rep. of Congo ($231)2. Burundi (271)3. Ethiopia (357)4. Malawi (365)5. Liberia (374)6. Sierra Leone (374)7. Niger (374)8. Guinea (430)9. Eritrea (482)10. Uganda (487)11. Central African Rep. (489)12. Madagascar (498)

13. Gambia (506)14. Tanzania(532)15. Mozambique (535)16. Afghanistan (543)17. Rwanda (583)18. Togo (588)19. Burkina Faso (600)20. Nepal (619)21. Guinea-Bissau (629)22. Mali (669)23. Haiti (726) 24. Zimbabwe (757)

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Introduction• Are the oilsands Canada’s future?• How important is infrastructure for trade?

– Bridges– Pipelines– Roads

• Did SNC Lavalin have a choice in bidding for foreign contracts?

• Can everything be outsourced?– Why is anything outsourced?

• Will the Internet make education and health tradable?• Why do people emigrate?

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Introduction• What might be the trade effects of emission caps

and trade systems?– Are cap and trade systems needed? Are they a fraud?

• Is it possible to settle trade disputes?• Should there be a Tobin tax?• Is international policy coordination realistic?• Can sanctions work?• Are free trade agreements really in our best

interests?

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Objectives

• Globalization – what does this mean?

• Determinants of exchange rates – capital flows or current account balances?

• International capital markets – determinants of capital flows, stability, risks

• Exchange rate regimes

• Supra-national regulation of capital markets – regulatory failures

• Central banks and blank checks – quantitative easing– The Fed

– The ECB

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Objectives

• Trade in goods and services – patterns, volumes, winners/losers

• Role of outsourcing; oil prices

• Trade policies – liberalized trade, protectionism

• Foreign ownership restrictions – the new trade barrier?– New rules restricting SOEs in Canada

• Role of the U.S. – will China become the engine for the world economy

• Need for new rules?

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Critique

• Limits of open economy macroeconomics

• Stability of capital flows – distinction between flows and stocks

• Momentum trading

• Markets and rules

• Returns and risk

• Systemic risks

• Adjustment mechanisms

• Trade theory cannot explain Airbus, Microsoft, Starbucks, Samsung

• Competitive vs. comparative advantages

• Culture

• Role of U.S.

• Interdependence and spillovers

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Markets

Markets and players– What is a market? – Rules and regulations: role of governments

• Labor laws, anti-bribery laws, contract laws• Government ownership; ownership restrictions• Ex ante vs. ex post rule making – political risk• Ability to influence rule makers – corruption • Political stability

– Market boundaries: Who’s in, who’s out?• Who’s waiting to get in?• Are the boundaries shifting?

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Markets

• Examples of laws and rules– Competition, employment, labor, contract,

criminal, environment, human rights, banking, tax, trade, privacy, copyright, anti-corruption

– Mark-to-market rules (EU and US), capital rules and risk weighting, bank tax, foreign ownership of financial institutions, deposit insurance

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Markets

• During the past 30 years, increasing emphasis by governments in Canada, the US and the UK, and to a lesser extent in other countries in the EU, South America and Asia, on using market mechanisms to achieve economic and political objectives

• Less reliance on regulations, crown (government-owned) corporations, and other forms of direct intervention

• Wave of privatizations (airports, water and electrical utilities, waste collection, education, health care, etc.), and deregulation (transportation, communications, financial services, foreign ownership limits, etc.)

• Governments adopted more outward-looking policies to increase competition; for example, free trade agreements – the GATT, the Canada-U.S. Free Trade Agreement, NAFTA; and a more benign stance towards foreign investment.

• Bi-lateral free trade agreements more common – CETA (Comprehensive Economic and Trade Agreement between Canada and EU)

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Markets

• Global financial crisis in 2008-09 led to increasing demands for re-regulation and more direct government intervention

• Sovereign debt crisis and the resulting financial crisis in Europe in 2010-12 also have resulted in demands for re-regulation

• But the more recent crisis has led to demands for austerity and a dramatically reduced fiscal presence by governments

• Germany is leading the way, and refuses to allow any European Union institution to prop up the profligate governments in Southern Europe unless these governments agree to severe belt-tightening measures

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Firms

• Collection of people working as team• Existence of firms

– Why do they exist?

– What does a “firm” maximize?

– Who makes the key decisions and why?

• Separation of ownership and control

• Risk taking

– How is accountability managed within the firm?

– How are they/how should they be organized?

– Limits on risk taking – creditors, regulators, reputation

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National Income Accounting

• GDP: Y = C + I + G + EX – IM• Current account (CU): EX – IM

– Y – C – G = CU + I

• Nominal GDP in Canada, 2011: $1,762 billion– Consumption (C): $956 billion (54%)– Investment (I): $414 billion (23%)– Government (G): $463 billion (26%)– Exports (EX): $539 (31%)– Imports (IM): $561 billion (32%)

• Investment spending the smallest of the five major categories, it is also generally the most volatile. Changes in business investment spending tend to be the major driver behind changes in aggregate demand and GDP

Canada in the Global Economy, 2011GDP (US$ B)

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World $69,110

EU 17,485

1 U.S. 14,991

2 China 7,318

3 Japan 5,867

4 Germany 3,601

5 France 2,773

6 Brazil 2,477

7 U.K. 2,445

8 Italy 2,194

9 Russia 1,858

10 India 1,848

11 Canada 1,736

12 Spain 1,477

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13 Australia 1,379

14 Mexico 1,153

15 South Korea 1,116

16 Indonesia 847

17 Netherlands 836

18 Turkey 775

19 Switzerland 659

20 Saudi Arabia 577

20 Sweden 540

22 Poland 514

23 Belgium 514

24 Norway 486

25 Argentina 446

Top 25 58,427

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Macroeconomics

• Top 10: $45,372 (66%)

• Top 25: $58,427 (85%)

• EU: 25%– Portugal: $237

– Italy: $2,194

– Ireland: $217

– Greece: $290

– Spain: $1,477

– PIIGS: $4,415 (6%)

• US: 22%

• Canada: 2.5%

• Brazil, Russia, India, China: $13,501 (20%)

Canada in the Global Economy, 2010GDP per Capita (US$)

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1 Luxembourg 114,508

2 Norway 98,102

3 Qatar 92,501

4 Switzerland 83,383

5 Macao SAR 65,550

6 Kuwait 62,664

7 Australia 60,979

8 Denmark 59,852

9 Sweden 57,091

10 Canada 50,345

11 Netherlands 50,076

12 Austria 49,609

13 Finland 48,823

14 Ireland 48,423

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15 U.S. 48,112

16 Belgium 46,663

17 Singapore 46,241

18 Japan 45,903

19 U.A.E. 45,653

20 Germany 44,060

21 Iceland 43,969

22 France 42,377

23 Brunei 40,301

24 U.K. 39,038

Brazil 12,594

Russia 13,089

China 5,445

India 1,489

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National Income Accounting

• Savings:– Private savings: SP = Y – T + TR – C

• Taxes: income, sales, health tax, “vice” taxes, carbon• Transfer payments: old age pension, employment insurance, workers’

compensation, social assistance, subsidies

– Government savings: SG = T – TR – G• Federal + provincial + municipal budget balances

– Total savings: SP + SG = Y – C - G

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Savings

• SP– Deleveraging– Paradox of thrift

– Relativism and savings • SG

– Fiscal stimulus in U.S., Canada, EU, Japan – Financing deficits – implications for interest rates,

exchange rates, SP• Traditional model

– Is there a debt wall? • Consider case of Greece, US, California

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Savings and the Current Account

• S = SP + SG = Y – C – G = I + CU– S > 0 I + CU > 0

– Building up capital stock and/or acquiring foreign wealth (assets)

– S < 0 I + CU < 0

– Building up foreign debt to finance investment, current consumption or government spending

• CU = SP – I + SG– If SG , CU also may (if SP and I do not change)

– Twin deficits: CU < 0 and SG < 0

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Balance of Payments

• Transactions resulting in payments to foreigners (conversion of C $ into foreign currencies) enters B. of P. as debit (-ve): purchase/import of goods, services, assets

• Transactions resulting in receipts from foreigners (conversion of foreign currencies into C$) enters as credit (+ve): sale/export of goods, services, assets

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Balance of Payments

• Current Account: transactions involving goods/services– Merchandise trade– Services: tourism, transportation, financial services,

business services, investment income– Sum of all current accounts across all countries = 0

• U.S. and ROW

– Statistical discrepancies – not all transactions captured (smuggling)

Canada’s Current Account

(C$ B) 1990 2000 2005 2010

GOODS

Exports 152.1 429.4 450.2 404.8

Imports 141.0 362.3 387.8 413.8

Balance 11.1 67.0 62.4 -9.0

SERVICES

Exports 22.4 59.7 67.6 71.3

Imports 33.0 65.5 79.7 94.0

Balance -10.6 -5.8 -12.1 -22.7

INVESTMENT INCOME

Exports 17.6 36.8 49.8 61.8

Imports 40.2 69.91 72.7 78.2

Balance -22.6 -33.1 -22.9 -18.1

Total Balance -23.1 29.3 25.9 -50.9

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15 Largest Exporters, 2011 (US$ B)

China 1,904

Germany 1,547

U.S. 1,497

Japan 787

France 590

South Korea 553

Netherlands 550

Italy 525

Russia 520

U.K. 479

Canada 463

Hong Kong 438

Singapore 415

Saudi Arabia 365

Mexico 349

World 17,77934

Exporters

• Other notable countries– India $307 B

– Brazil: $256 B

– U.A.E.: $282 B

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15 Largest Importers, 2011 (US$ B)

U.S. 2,314

China 1,743

Germany 1,339

Japan 795

France 685

U.K. 655

Italy 541

South Korea 525

Netherlands 514

Hong Kong 493

India 489

Canada 470

Spain 315

Singapore 310

Mexico 306

World 18.00036

10 Largest Current Account Surplus Countries, 2011 (US $ B)

Germany $203

China 202

Saudi Arabia 158

Japan 119

Russia 99

Netherlands 81

Norway 70

Singapore 52

Switzerland 50

Kuwait 45

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10 Largest Current Account Deficit Countries, 2011 (US $ B)

U.S. $473

Turkey 77

Italy 67

India 60

France 54

Brazil 52

Spain 52

Canada 49

U.K. 46

Greece 29

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