Extract 5:

Global trade and BoPimbalances and global

economic stability

Key quotes from the stimulus

“Economists feared that, whatever the causes,

these global trade and balance of payments

imbalances might endanger the stability of the

global economy.” (Extract 5)

“One of the greatest threats in late 2010 to both

developed and developing economies alike was

the growing global trade and balance of payments

imbalances.” (Introduction)

Understood the nature of global trade and BoP imbalances

Analysed two competing causes of global trade and BoP imbalances

fundamentally misaligned currencies

macroeconomic imbalances (S ≠ I)

Researched currency wars and their consequences

What have we done so far?

Understand the nature of global economic stability

Analyse how trade & BoP imbalances may cause global economic instability through impact of

protectionism

currency wars

Analyse why trade & BoP imbalances may notthreaten global economic stability

Evaluate the extent to which global economic stability is threatened by these imbalances

are there bigger ‘threats’?

What we now need to do

What is economic stability at the national level?

DefinitionThe avoidance of volatility in

economic growth rates, inflation, employment and unemployment

and exchange rates

Why is it important?

Instability damages long

term performance of

the economy

Confidence itself promotes

consumption and investment

Economic stability reduces uncertainty and

promotes confidence

Investment, in particular is the key to raising AS and the long run

growth rate

Global economic stability requires

constant growth in global output

avoiding economic crises

the promotion of the growth of world trade

avoiding excessive volatility in exchange rates and financial markets

low inflation

The IMF is charged with promoting global economic stability

The nature of global economic stability

Write an opening paragraph for an essay on the link between trade and BoP imbalances and global economic stability

Include the following

an explanation of the nature of trade and BoP imbalances

brief statements on competing views on why they have arisen

statements about fears of what they might lead to – protectionism and currency wars

brief explanation of the nature of global economic stability

Task 1: upload to VLE

The rise of protectionism

It is argued that trade raises global GDP This arises because trade results in a better allocation

of global scarce resources Reducing the volume of world trade through

protectionism will reduce global GDP by reducing global AD (C+I+G)

Trade and global GDP

Production before trade(50% of resources

to each product)

Production after trade €(UK partial specialisation,

Kenya complete specialisation)

Financial

services

Cut

flowers

Financial

services

Cut

flowers

UK 5 5 8 2

Kenya 2 4 0 8

World

total 7 9 8 10

Write a paragraph explaining the impact of protectionism on global economic stability

Include the following

how trade and BoP imbalances may result in protectionism

different types of protectionist measures and what they do

recent examples of protectionist measures

an analysis of the impact of protectionism on global economic stability

Task 2: upload to VLE

Currency wars: the 1930s

Currency wars: the 2010s

Currency wars: US$

Currency wars: resources

Faced with large current account deficits, some countries may devalue their currencies especially if they believe that global currencies are misaligned

The aim is to raise exports by lowering export prices and reduce imports by raising import prices

success depends upon PEDsimportance of the Marshall-Lerner Condition

The danger is that this sets of a series of competitive devaluations / competitive non-appreciations

This threatens global economic stability by creating exchange rate uncertainty and reducing the volume and growth of world trade

Currency wars may also be indirectly caused bycapital controls which limit FDIQuantitative Easing (QE) which risks increasing global inflation

Currency wars: the basics

Write a paragraph explaining the impact of currency wars on global economic stability

Include the following

why it is feared currency wars may come about

some recent context

an analytical explanation of what countries hope to achieve by devaluing their currency

an analytical explanation of how currency wars might threaten global economic stability

Task 3: upload to VLE

We now have key paragraphs which can be used in any essay on the threats to global economic stability created by trade and BoP imbalances

1. Introduction to stability and imbalances

2. Imbalances encourage protectionism which threatens stability

3. Imbalances encourage currency wars which threaten stability

Taking stock ...

We now need to think about lines of evaluation which allow us to

discuss the extent of the threat posed by trade and BoP imbalances

look at ways in which the threat might be reduced

explore whether the threat is significant

question whether trade and BoP imbalances are the only threats to global economic stability

suggest whether other threats might be more significant

Next steps ...

In pairs

read two of the articles in the folder on the VLE

produce a brief bullet point summary of tehkey points of each article (no more than 4 bullet points)

suggest how these key points might give useful lines of evaluation for the essay

feedback to the rest of the class

Task 4: lines of evaluation

Imbalances can be corrected by currency realignment so that currency wars may not happen

Refer to real exchange rates

Look up Plaza Accord

Imbalances can be corrected by rebalancing savings and investment or may self-correct

Conclusion which reaches justified judgement on extent of the threat

depends on extent of global economic co-operation to avert destabilising capital flows

eurozone crisis may be a greater threat

A suggested structure