INTERNATIONAL TRADE

Lecture (7)
Dr. Maha Asfour
Lecturer of Economics
Faculty of Economic Studies and Political Science
Alexandria University
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National Income Accounting
and The Balance of Payments

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Balance of Payments
• Important component of GDP
• Changes in components influence economic performance in short run
• As trade becomes a larger proportion of GDP, it will have a greater
impact on short run performance
• Country’s interaction with world affects country’s production of
goods/services as well as financial markets

3
National Income Accounting
• Calculation of GDP and subdivision of GDP
• Imports and exports are a part of GDP but also related to other components
• Relationships between components of GDP and exports/imports help
interpret effects of economic events

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Measurement of GDP
• GDP – market value of all final good and services produced in a
country in a given period of time
• Total output measured in country’s currency with goods/services
measured at market prices
• Not all transactions are accounted for
• Constant changes in prices must be considered for comparison across
time

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Exclusions from GDP
• Intermediate goods
• Only final goods/services - Value added by all inputs
• Value of a desk, not value of wood in desk
• Non-reported market transactions and activities
• Homemakers
• Tax evasion, illegal goods
• GDP is understated – conservative estimate of country’s total
economic activity

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Changes in Prices
• Current prices can distort measure of real output
• A doubling of prices doubles value of GDP
• Does not mean twice the amount of goods/services were produced
• Are increase in GDP from increases in prices or quantity of goods?

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Real v. Nominal GDP
• Nominal GDP
• Value of final output measured in current prices
• Real GDP
• Market value of goods and services produced within a period of time adjusted
to changing prices – measured in base year prices

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Components of GDP
• Summation of expenditures by different components of country
• Consumption (C)
• Gross Private Domestic Investment (I)
• Government spending on goods/services (G)
• Net Exports (NX) = Exports (X) – Imports (M)

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Components of GDP

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GDP and Trade Balance
• Closed Economy (no trade)
GDP = C + I + G
• Open Economy
GDP = C + I + G + (X - M)
• Trade Surplus
• X > M à (X - M) > 0
• Trade Deficit
• X < M à (X - M) < 0

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Imports, Exports & GDP
• A trade deficit means a country is increasing it indebtedness to other
countries
• Trade surplus means a country is reducing its indebtedness to other
countries
• Trade surplus and deficit measure mismatch between domestic
production and domestic consumption
• Not necessarily true that a surplus is better

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GDP – Current Income
• Sum of inflows must equal sum of outflows
G+I+X=S+T+M
• Rearranging
X–M=S–I+T–G
• Trade balance mismatch between private saving (S), government
saving (T-G) and business saving (I)

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GDP – Current Income
• When outflows (S+T) are greater than spending injections (G+I), trade
balance (X-M) is positive
• When outflows are less than injections, trade balance is negative
• Trade balance is difference between outflows of income and domestic
injections of spending
X – M = (S + T) - (I + G)

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Trade Imbalance
• Reduction of trade imbalance
• Produce more goods/services than consume
• Increasing production in short run difficult
• Reduce domestic spending in short run
• Not appealing solution

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 Methods to Reduce Imbalances
Given X - M = S – I + T – G
A country has four strategies to reduce imbalance

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Strategies – Reduce Deficit
1. Increase S – savings
• Decline in savings rate from 1970s – 1980s has contributed to US trade
deficit
• Difficult to implement policies to increase savings
2. Decrease I – investment
• Potential GDP growth linked to increase in I
• Short run strategy to decrease I could lead to long run decline in economic
growth

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Strategies – Reduce Deficit
3. Increase T – taxes
• Reduces government budget deficit or produces a surplus
• Similar to increasing level of saving
4. Reduce government spending
• More effect if combined with increases in taxes
• More certain than increasing S and more desirable than reducing I

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Strategies – Reduce Surplus
1. Decrease Savings which increases consumption
2. Increase investment which also increase long run growth potential
3. Increasing government spending or decreasing taxes
4. Reduce government budget surplus or increase size of deficit

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