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Mr. Massimo M BeberFellow in Economics
Sidney Sussex CollegeCambridge CB2 3HU
[email protected]/mb65/mpes
European EconomicsLecture 1
Economic Integration:
Definition, Measurement, and Macroeconomic Significance
(Provisional Version: last updated 8th October 2007)
M.Phil. in Contemporary European Studies 2007/8
©Massimo M Beber 2007
Lecture 1 - Objectives
• Key Concepts– Absolute and Comparative Advantage– International Division of Labour (Specialisation)– Payments Adjustment– Macroeconomic (Income-Expenditure) Equilibrium– The Flow of Funds Framework– Foreign Economic Policy: a Classification
• Key Metrics– Openness (trade, finance, migration)– Performance (growth, inflation, unemployment)– Sustainability (environmental, social, ethical)
Comparative vs Absolute Advantage
• England• 1 worker=3 wine barrels• 1 worker=6 wool bales• Wage=£18• Price of Wine=£18/3=£6• Price of Wool=£18/6=£3• Relative price=2 bales
per barrel
Portugal• 1 worker=2 wine barrels• 1 worker=3 wool bales• Wage=£18• Price of Wine=£18/2=£9• Price of Wool=£18/3=6• Relative price=1.5 bales
per barrel
Automatic International Adjustment
Gold Outflow
Trade Deficit
No offsetting capital inflows
“Rules of the game” apply in the deficit country
Prices fall
Money stock falls
Quantity theory of money
Other countries also respect the “rules of the game”
Responsive demand, both on the export and on the import side
Real Depreciation
Trade Balance
Macroeconomic Equilibrium
Resources– Gross Domestic Product– Imports
Domestic Production• GDP
Uses– Domestic Absorption
• Private Consumption• Investment• Public Consumption
– Exports
Total Expenditure• Domestic Absorption
plus Net Exports
THE CIRCULAR FLOW OF INCOME
Business Sector Household Sector
Public Sector
Financial Sector
Foreign Sector (RoW)
Total Output/Income/GDP
Net Taxes
Net Savings
Imports
Consumers’ Expenditure
Public Expenditure on Goods and Services
Business Investment
Exports
Changes in Absorption and Trade behind GDP Growth - Euro Area 2006
Source: Commission Services (European Economy News website, October 2006
The Flow of Funds Framework
• Saving equals income (GDP) less consumption• Private savings is disposable income less consumption• Public saving is tax revenue less public expenditure• National (private and public) savings is GDP (net of taxes)
less consumption, less the public sector deficit• National saving equals the trade balance
• NS = [(Y-T)-C] – (G-T) = Net Exports≈Current Balance
TYPES OF INTERNATIONAL PAYMENTS
CURRENT ACCOUNT +
CAPITAL ACCOUNT =
BALANCE OF PAYMENTS =
ACCUMULATION OR LOSS OF RESERVES
UK BALANCE OF PAYMENTS, 1992
CATEGORY OFTRANSACTION
GROSS FLOWS(% GDP)
BALANCE(% GDP)
Visible Trade (1) 38.2 - 2.2Total Invisibles (2) 35.6 0.8- Services 5.5 1.0- Travel 3.2 - 0.6- Sea & Air Transp. 2.8 - 0.2- Financial 3.9 1.8- Investment Income 22.8 1.0- Unilateral Transfers 2.5 - 0.9CURRENT ACCOUNT (1+2) 73.8 - 1.4Bank Lending to Non-residents 16.8 3.0Portfolio Investment 9.1 - 2.2Foreign Direct Investment 3.3 -0.2CAPITAL BALANCE 28.9 0.6BALANCE OF PAYMENTS - 0.8CHANGE IN OFFICIAL RESERVES - 0.2BALANCING ITEM 0.6Source: Calculations from Financial Statistics, Central Statistical Office (various tables;rounding differences).
Mobility of Capital and
Labour
Microeconomic Policy Co-ordination
Common Macroeconomic
Policy
No internal tariffs
Common External Tariff
FREE TRADE AREA y n n n n
CUSTOMS UNION y y n n n
COMMON MARKET y y y n n
SINGLE MARKET y y y y n
EMU y y y y y
Trade in Goods and Services
Source: a version of a Table introduced by Bela Balassa in The Economics of Integration (1961)
ECONOMIC INTEGRATION: A CLASSIFICATION
LONG TERM GROWTH RATES OF INDUSTRIAL COUNTRIES
(Annual Average % Change of GDP and Exports)
COUNTRY 1870-1913 1894-1913 1950-1972 1973-1993
GERMANY 2.8 (4.1) 3.3 (6.2) 6.1 (12.3) 1.9 (5.2)
FRANCE 1.6 (2.7) 1.8 (9.7) 5.1 (8.1) 2.4 (5.0)
ITALY 1.5 (2.2) 2.7 (3.2) 5.4 (12.0) 3.1 (4.7)
UK 1.9 (2.7) 1.9 (3.7) 2.7 (3.5) 2.5 (3.6)
US 4.2 (4.9) 4.4 (4.1) 3.7 (5.5) 2.4 (6.6)
JAPAN 2.5 (8.5) 2.3 (8.2) 9.7 (15.9) 3.3 (6.4)
AVERAGE G6 2.4 (4.2) 2.7 (5.9) 5.4 (9.6) 2.6 (5.3)
Source: Maddison (1982); European Economy (1993).
LONG-TERM TRENDS IN TRADE OPENNESS
19.4% 19.2%
25.0%
28.4%29.8%
34.8%
4.9% 5.0%
7.8% 8.4%
10.8%9.8%10.5% 9.8%
12.0% 12.3%
9.9%11.1%
0%
5%
10%
15%
20%
25%
30%
35%
40%
1960 1961-1970 1971-1980 1981-1990 1991-2000 2002
Source: European Economy Annual Review (2003), Statistical Annex
Tota
l E
xpo
rts a
t C
urr
ent
Pri
ces,
% o
f G
DP
EURO-15 USA JAPAN
The Direction of EU Good Exports
20%
30%
40%
50%
60%
70%
80%
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Source: AMECO Database
Intr
a-E
U E
xpo
rts
as %
of
To
tal E
xpo
rts
EU=15 EU-25
The Direction of EU Good Exports
20%
30%
40%
50%
60%
70%
80%
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Source: AMECO Database
Intr
a-E
U E
xpo
rts
as %
of
To
tal E
xpo
rts
Italy France UK Denmark
FORTRESS EUROPE? TRENDS IN MERCHANDISE TRADE
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
1960 1961-1970 1971-1980 1981-1990 1991-2000 2002
Source: European Economy Annual Review, Statistical Annex
Me
rch
an
dis
e E
xp
ort
s,
% G
DP
UK (intra-EU) UK (extra-EU) EU-15 (intra-EU) EU-15 (extra-EU)
BALANCE OF PAYMENTS TRENDS
0.2% 0.6%
2.3% 2.4% 2.3%
0.4%
-0.1% -0.3%
0.1%
-0.1%
0.4%
-0.2%
-1.0%
-1.4%
-2.9%
0.6% 0.2%
-1.7% -1.7%
-3.3%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
1960s 1970s 1980s 1990s 2002
Source: European Economy
Cu
rre
nt
Ba
lan
ce
(%
of
GD
P)
JAPAN EURO-15 UK USA