宏观经济学-课后思考题答案_史蒂芬威廉森013

Chapter 13

International Trade in Goods and Assets

Teaching Goals

There are two basic aspects to international trade. Trade in goods and services allows a nation to benefit from comparative advantage. In the absence of trade, competitive markets allow the economy to reach a Pareto optimum. At this optimum, the marginal rate of substitution for consumers is equal to the marginal rate of transformation in production. These marginal rates are reflected in market prices. If we open up an economy to trade, the country can improve its welfare as long as closed economy relative prices differ from the relative prices in the rest of the world. It does not matter in which direction this difference works. In either case, the representative consumer can reach an indifference curve that lies beyond the one reached in the absence of trade. This is the essence of gains to trade.

The second aspect of trade involves trade in financial assets. A closed economy is required to exactly exhaust its total output in each period between consumption, investment, and government spending. An open economy can use either more or less than the output it produces in each period. Differences between production and absorption can occur when the current account is either in surplus or deficit. A common misimpression for students is to think of the current account balance as reflecting competition for sales by firms in different countries. A better insight into the current account balance comes from considering the additional option for consumption smoothing that comes from borrowing and lending activities with those in other countries. One clear case for the benefits of running a current account deficit is for a country that wants to increase its capital stock more quickly than would be possible in the absence of foreign borrowing. Classroom Discussion Topics

Support for protectionist trade policies comes to the forefront from time to time. Ask students for arguments they have heard that rationalize tariffs or quotas. Ask them if they support such policies, or find the reasons given for protectionist sentiment compelling. What does fair trade as opposed to free trade mean? Guide them in the direction of finding market failures in international trade. Distinctions between free and fair trade only have meaning if there is monopoly power in the markets for traded goods, or if there are externalities that are complicated by the differing rules of different sovereign nations. Monopoly power may be involved in the steel and automotive industries. Is this a concern for students? Trade protection is also proposed because other nations have more lax environmental restrictions. Don’t we benefit from the decision of other countries to specialize in dirty industries?

Trade policies usually boil down to attempts by those who are hurt by trade to seek compensation from those who benefit from trade. What are the likely differences in relative prices between a closed United States and the rest of the world? Much of recent concern has its roots in the fact that the value of skilled labor relative to unskilled labor is much higher in the rest of the world than it would be in a closed United States. Are trade policies a relatively efficient or inefficient means to affect the distribution of income? Are students able to see trade policy issues as economists see them? Encourage the students to couch their views of trade policies in the language of economics.

Chapter 13 International Trade in Goods and Assets 129

Another concern voiced in the popular press relates to the fact that the United States has been running consistent deficits in the current account balance. Are students concerned about the balance of payments? Why or why not? Remind the students that current account surpluses and deficits are equivalent to

international borrowing and lending. Is it ever a good idea to try to prevent markets from functioning in a competitive manner? Be sure that they understand that encouraging exports and discouraging imports

cannot solve the problems inherent in the desire to smooth consumption and expand investment as long as the marginal product of capital exceeds the world real interest rate.

Regarding modeling strategies, ask students how a closed economy differs from an open economy. With the representative agent construct, just splitting an economy in two would not yield anything interesting. There needs to be something different in the two parts: different realizations of shocks, difference

currencies, different policies, etc. Also, discuss the distinction between a small open economy and a large open economy (à la two-country model).

Outline

I. A Two-Good Model of a Small Open Economy

A. Introduction

1. The Small Open Economy Assumption

2. Terms of Trade

3. The Real Exchange Rate

4. The PPF

B. Competitive Equilibrium without Trade

1. Pareto Optimality: ,,a b a b MRS MRT =

2. Efficiency in Consumption: ,,a b a b MRS p =

3. Efficiency in Production: ,,a b a b MRT p =

C. Effects of Trade

1. International Price-Taking

2. Efficiency in Consumption: ,a b ab MRS TOT =

3. Efficiency in Production: ,a b ab MRT TOT =

4. Comparative Advantage

5. Trade and Welfare

D. A Change in the Terms of Trade

1. Trade Effects when Good a Is Imported

2. Trade Effects when Good b Is Imported

II. A Two-Period Small Open Economy

A. The Intertemporal Budget Constraint

B. Response of the Current Account to Disturbances

1. Current-Period Income and the Current Account

2. Current Government Spending and the Current Account

3. Taxes and the Current Account

4. The Real Interest Rate and the Current Account

C. The Current Account and Consumption Smoothing

D. The Twin Deficits

130 Williamson ? Macroeconomics, Third Edition

III. Production, Investment, and the Current Account

A. Output Supply and Output Demand

B. Effects of Disturbances

1. An Increase in the World Interest Rate: ,Y CA ↑↑

2.

A Temporary Increase in Government Spending: ,Y CA ↑↓ 3.

A Permanent Increase in Government Spending: ,Y CA ↑↑ 4.

An Increase in Current Total Factor Productivity: ,Y CA ↑↑ 5. An Increase in Future Total Factor Productivity: 0,Y CA Δ=↓

C. Consumption, Investment, and the Current Account

Textbook Question Solutions

Questions for Review

1. A small open economy is an economy that does not affect the world price of goods.

2. The small open economy model is useful in explaining events in the United States because it is

relatively simple, many of the conclusions drawn from the small open economy model are identical to those obtained from more complicated models, and the size of the U.S. economy as a fraction of worldwide GDP is shrinking.

3. In the closed economy, the marginal rate of substitution between the two goods must equal the

marginal rate of transformation between the two goods. Furthermore, consumption of each individual good must be equal to production of that good.

4. In the open economy, the marginal rates of substitution and transformation between the two goods

must equal the given terms of trade.

5. The residents of an open economy must be better off. An open economy has all of the possibilities of

a closed economy, and its options are expanded with the opportunity to trade.

6. Production of good a rises and production of good b falls. Consumption of good a falls, but

consumption of good b may either rise or fall.

7. Production of good a rises and production of good b falls. Consumption of good b rises, but

consumption of good a may either rise or fall.

8. The current account surplus depends upon current period income, current government spending,

taxes, and the real interest rate.

Chapter 13 International Trade in Goods and Assets 131 9. A current account deficit may help an economy to grow over time if the deficit is used to finance

investment spending.

10. The twin deficits refer to the simultaneous deficits in the government budget and the current account.

The large government budget deficit was the result of a simultaneous increase in government

spending and a reduction in taxes. Unless the reduction in government savings is matched by an equal or larger increase in private savings, the current account deficit must increase.

11. An increase in the world real interest rate increases output, reduces absorption, and increases the

current account surplus.

12. A temporary increase in government spending increases output, increases absorption, and decreases

the current account surplus. A permanent increase in government spending increases output, has no effect on absorption, and increases the current account surplus.

13. An increase in current total factor productivity increases output, has no effect on absorption, and

increases the current account surplus. An increase in future total factor productivity has no effect on output, increases absorption, and decreases the current account surplus.

14. A current account deficit used to finance investment spending provides for a larger future capital

stock. The increased capital stock increases future output, which tends to reduce the future current deficit.

Problems

1. The change in preferences cannot change the terms of trade for a small open economy. Therefore,

production of each good is unchanged. The shift in preferences implies increased consumption of good a, and reduced consumption of good b. If good a is originally imported, then imports and

exports both increase. If good a is originally exported, then imports and exports both decrease.

2. If the marginal rate of transformation increases for every quantity of good a, then there is a shift in

the production possibilities frontier. In particular, there is no change in the maximum amount of good

b that can be produced, so there is no change in the horizontal intercept. The rest of the PPP becomes

steeper and lies everywhere else above the original PPP. Production of good b increases, but

production of good a may either rise or fall. If the increase in the marginal rate of substitution rotated the original PPP around the original production point, then production of good a would decrease.

The outward shift in the PPP produces a positive income effect. However, because there can be no change in the terms of trade, there can be no substitution effect in consumption. Consumption of goods a and b both increase. Suppose that, as a first approximation, that production of good a is unchanged. If good b is originally exported, then exports of good b increase along with imports of good a. If good b is originally imported, then imports of good b decrease along with exports of

good a.

132 Williamson ? Macroeconomics, Third Edition

3. Suppose that the economy starts out as in the figure below. The economy produces 1a units of good a

and 1b units of good b . Consumers consume 2a units of good a and 2b units of good b . The economy

therefore exports good b and imports good a . Now assume that a quota is placed on imports of good a , and that this quota is, in fact, a binding constraint. Denote the size of the quota as <32.b b

The budget line now becomes vertical at 3.b The new budget line is depicted in the figure below. The

economy continues to produce at point 11(,).a b Consumption is at point 33(,).a b Therefore, less of good a is imported and less of good b is exported. Consumers are definitely worse off. They are no longer able to consume at a point on indifference curve, 1.I They are forced to the less desirable

indifference curve, 2.I

Chapter 13 International Trade in Goods and Assets 133

4. Government spending with perfect-complements preferences.

(a) The net amount of income available from domestic production net of government spending in the

first period is equal to 100 ? 15 = 85, and the net amount of income available from domestic

production net of government spending in the second period is equal to 120 ? 20 = 100. The budget constraint is given by:

100851.1 1.1

C C ′+=+ Setting first-period and second-period consumption equal, we find that consumption in both

periods is equal to 92.14. The current account surplus is equal to domestic income, 100 minus consumption, 92.14, minus government spending, 15, so the current account is equal to –7.14, a deficit. The endowment point, E, and the consumption point, F, are depicted in the first figure below.

134 Williamson ? Macroeconomics, Third Edition

(b) Net first-period income now falls to 75. The budget constraint is given by:

100751.1 1.1

C C ′+=+ Setting first-period and second-period consumption equal, we find that consumption in both

periods is equal to 87.86. The current account surplus is equal to domestic income, 100 minus consumption, 87.86, minus government spending, 25, so the current account is equal to –12.86, a larger deficit. The endowment point, E, and the consumption point, F, are depicted in the second figure above.

(c) In this problem, the increase in government spending leads to a larger current account deficit.

The representative consumer increases her borrowing so that first-period consumption need not fall as much as the temporary increase in government spending.

5. Different borrowing and lending rates.

(a) For levels of first-period consumption less than Y – T , the consumer lends his private savings,

and earns the world real rate of interest, r . For levels of first-period consumption greater than

Y – T , the consumer must borrow at the higher real rate of interest, r *. The representative

consumer’s budget line is bowed out, away from the origin. A change in r * steepens the part of the budget line where C > Y – T . If the consumer was originally a saver, the change in r * has no effect on consumption or the current account surplus. If the consumer was originally a borrower, the budget relevant portion of the line rotates through the point (,).Y T Y'T'?? The substitution effect of the change in r * implies lower first-period consumption and higher second-period

consumption. The income effect of the change in r* decreases both first-period and second-

period consumption. Since first-period consumption unambiguously decreases, the current

account surplus must increase.

(b) A tax cut financed by government borrowing pushes the kink in the budget constraint to the right.

If the representative consumer is a lender, there is no effect. If the representative consumer is a borrower, this represents a pure income effect. Both first-period and second-period consumption increase. If the current account is initially in balance, then the current account goes into deficit. The representative consumer is able to get to a higher indifference curve, so welfare increases. The government is able to pass along the ability to lend at the world real interest rate, so the

additional costs of borrowing are eliminated.

6.

Current account deficit policies.

(a) If Ricardian equivalence holds, then the level of lump-sum taxation has no effect on the current

account. The first group of advisors would therefore be wrong. A tax on investment shifts the

investment demand schedule to the left. The output supply curve is unchanged. The output

demand curve continues to pass through the original equilibrium position at the given world real interest rate. Because investment has decreased, absorption decreases, so the current account

deficit declines. Therefore, the best advice to take would be to adopt the investment tax.

(b) The concern with the current account deficit is misguided in this instance. The deficit is being

used to finance investment spending. Over time, the increase in investment leads to a larger stock of capital, the output supply curve shifts to the right, and the current account deficit eventually disappears. If the policy is implemented, the stated objective could be met, but welfare would be lower, and the policy would continue to be needed, because it would be difficult for the economy to grow its way out of the situation that caused the deficit.

Chapter 13 International Trade in Goods and Assets 135 7. The expected future increase in government spending decreases lifetime wealth. The output supply

schedule shifts to the right. At the unchanged real interest rate, investment is unchanged and both current and future consumption decrease. Absorption decreases and output increases, so the current account must increase.

8. A persistent increase in total factor productivity would shift both the output supply curve and the

output demand curve to the right. The supply curve shifts due to higher employment and higher

productivity. Investment demand increases due to the increase in expected future productivity.

Consumption increases due to the increases in current and future income. The analysis of Chapter 11 argued that the shift in the supply curve would be larger than the combined effects of the changes in investment and consumption, so the current account balance would also increase. At the given world real interest rate, investment increases. At the given world real interest rate, the increase in domestic income increases consumption. These predictions are in line with the typical business cycle.

However, this scenario is inconsistent with Figure 13.10 in the text. In the data, the current account is negatively correlated with output. In this example, output and the current account move in the same direction.

9. The increase in future government spending reduces the present value of lifetime income. Labor

supply increases, so the output supply curve shifts to the right, and so output increases. Consumption spending decreases due the decrease in lifetime wealth. Investment is unchanged. Therefore, the current account surplus increases.