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Macroeconomics II: Net-Export, International Trade and Real Exchange Rate
Macroeconomics II: Net-Export, International Trade and Real Exchange Rate
Dániel Baksa
ELTEcon
ELTEcon
Macroeconomics II
Outline for this week:
Dániel Baksa
Introduction
International trade: Ricardian model
Comparison of competitive trade theories: richness of Real exchange rate
endowment (Hecksher-Ohlin), comparative advantage Firms
Households
(Ricardian), love of varieties (Increasing return to scale) Export and import
Role of real exchange rate in general
equilibrium models
Examples for export and import in general equilibrium
models
Readings:
Obstfeld, M & Rogoff, K (1996): Foundations of
International Macroeconomics, Chapter 4
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Macroeconomics II
!!!!!!!!!!!!!!!!!!!
Dániel Baksa
Textbooks Introduction
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Macroeconomics II
Dániel Baksa
Introduction
Ricardian model
4
Macroeconomics II
Dániel Baksa
Introduction
Ricardian model
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Macroeconomics II
Dániel Baksa
Introduction
Ricardian model
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Macroeconomics II
From the last lectures
Dániel Baksa
Introduction
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Macroeconomics II
Plan for today:
Dániel Baksa
Introduction
Ricardian model
1 Need to understand core motivation: who, when trade Real exchange rate
Firms
(or export, import): Ricardian model Households
2 The equilibrium price determination: terms-of trade and Export and import
in general
real-exchange rate equilibrium models
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Macroeconomics II
3 main theories
Dániel Baksa
Introduction
Ricardian model
1 Hecksher-Ohlin: relative richness of endowments
Real exchange rate
(capital and labor) Firms
Households
2 Ricardian: relative productivity Export and import
in general
3 Krugman: love of varieties, increasing return on newly equilibrium models
established industries
First two can be implemented in the same framework, third
is better in growth theory.
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Macroeconomics II
Ricardian model: Firms (1)
Dániel Baksa
Introduction
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Macroeconomics II
Ricardian model: Firms (2)
Dániel Baksa
Ricardian model
So the relative wages express the relative productivity Real exchange rate
differentials: Firms
Households
Cost minimization:
Z 1
min pt (z)ct (z)dz
ct (z) 0
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Macroeconomics II
Ricardian model: Households (2)
Dániel Baksa
Lagrangian:
Z 1 Z 1
L = min pt (z)ct (z)dz + λt Ct − exp ln ct (z)dz Introduction
ct (z) 0 0
Ricardian model
Rearranging:
λt
ct (z) = Ct
pt (z)
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Macroeconomics II
Ricardian model: Households (3)
Dániel Baksa
And we can express λt :
Z 1
1
1 = λt exp ln dz
0 pt (z) Introduction
Z 1 Ricardian model
1 1
= exp ln dz Real exchange rate
λt 0 pt (z) Firms
Z 1 Households
λt = exp ln pt (z)dz
0
Introduction
B(z,L*/L) Ricardian model
w/w*
z 1
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Macroeconomics II
Ricardian model: Comparative static (1)
Dániel Baksa
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Macroeconomics II
Ricardian model: Comparative static (1) - graph
Dániel Baksa
Introduction
B(z’,L*’/L)
B(z,L*/L) Ricardian model
w/w*
1
z' z
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Macroeconomics II
Ricardian model: Comparative static (2)
Dániel Baksa
Ricardian model
Foreign wages increase (shifts A(·) down), the domestic
Real exchange rate
relatively declines Firms
Households
zt+1 < zt , so more produced by foreign economy: Export and import
domestic economy imports more from abroad, and in general
equilibrium models
export less
Domestic terms-of-trade improves: domestic prices
relatively increase
Real wages: both increase, but foreign relative wages
improve
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Macroeconomics II
Ricardian model: Comparative static (2) - graph
Dániel Baksa
Introduction
B(z,L*/L) Ricardian model
A(z)
A’(z) Real exchange rate
Firms
Households
w/w*
w'/w*’
z' z 1
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Macroeconomics II
Ricardian model and others
Dániel Baksa
Introduction
realistic
Focusing differentiated goods: tradable and
non-tradable production
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Macroeconomics II
Two sector (1)
Dániel Baksa
Tradable production
Introduction
YtN = AN N N
t G (Kt−1 , Lt )
ytN = AN N
t g (kt−1 )
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Macroeconomics II
Two sector (2)
Dániel Baksa
Introduction
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Macroeconomics II
Two sector (3)
Dániel Baksa
pt AN
t
N
f (kt−1 ) − g 0 (kt−1
N N
)kt−1 = wt equilibrium models
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Macroeconomics II
Two sector (4)
Dániel Baksa
p̂t + ÂN N N N
t + α k̂t−1 = αN k̂t−1 + (1 − αN )ŵt
Export and import
in general
equilibrium models
ÂT
t = (1 − αT )ŵt
p̂t + ÂN
t = (1 − αN )ŵt
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Macroeconomics II
Dániel Baksa
Introduction
Ricardian model
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Macroeconomics II
Households (1)
Dániel Baksa
Introduction
Ricardian model
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Macroeconomics II
Households (2)
Dániel Baksa
Assuming in the first step we choose the optimal level
of total consumption from the following problem:
Vt = U(Ct ) + βEt Vt+1 Introduction
Ricardian model
Now the households need to decide the combination of
Real exchange rate
traded and non-traded goods for the consumption Firms
Households
basket:
Export and import
θ−1
θ
θ−1 θ−1
in general
1 1 equilibrium models
Ct = γ θ CtT θ + (1 − γ) θ CtN θ
FOCs:
Ct : Pt − λ t = 0 Introduction
1 1 −1 Ricardian model
CtT : −1 + λt Ct γ θ θ CtT θ =0
Real exchange rate
1 1 − θ1 Firms
CtN : −pt + λt Ctθ (1 − γ) θ CtN =0 Households
−θ
1
CtT = γ Ct
Pt
−θ
pt
CtN = (1 − γ) Ct
Pt
h i 1
1−θ 1−θ
Pt = γ + (1 − γ)pt
Pt = 1γ pt1−γ
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Macroeconomics II
Real-exchange rate
Dániel Baksa
Ricardian model
Pt = 1γ pt1−γ
Real exchange rate
Pt∗ = 1γ pt∗ 1−γ Firms
Households
Taking logs:
Ricardian model
1 − αN T ,∗ N,∗ 1 − αN T N Real exchange rate
Ẑt = (1 − γ) Â − Ât − Â + Ât
1 − αT t 1 − αT t Firms
Households
1 − αN T ,∗ T
N,∗ N Export and import
= (1 − γ) Ât − Ât − Ât − Ât in general
1 − αT equilibrium models
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Macroeconomics II
Dániel Baksa
1 2
P EU R "S j=EU R j
Real Exchange Rates Z j = Pj in Central Europe, Z1996M01 = 100
110
Hungary
Czech Republic Introduction
Poland
100 Ricardian model
70
60
50
1996:01 1998:01 2000:01 2002:01 2004:01 2006:01 2008:01 2010:01 2012:01 2014:01 2016:01
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Macroeconomics II
Dániel Baksa
Introduction
Ricardian model
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Macroeconomics II
Export, import in general (1):
Dániel Baksa
Introduction
Ricardian model
No best way, many concepts and Real exchange rate
depends on a given country Firms
Households
depends on a question Export and import
depends on our abstraction in general
equilibrium models
Common feature:
relative price changes
GDP identitiy should satisfies
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Macroeconomics II
Export, import in general (2):
Dániel Baksa
Ricardian model
GDPt = Ct + It + Gt + EXt − IMt Real exchange rate
Firms
Households
where each demand components consist Export and import
traded/non-traded or domestic/imported part. in general
equilibrium models
Depends on our assumption, total production uses
domestic capital, labor and imported goods
GDP is value added, so it not contains other country
goods (import)
Import part of the production function or it is part of
each expenditure components
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Macroeconomics II
Import:
Dániel Baksa
1 Import as production input
Yt = F (Kt−1 , Lt , IMt )
Introduction
and the GDP
Ricardian model
GDPt = Yt − PtIM IMt Real exchange rate
Firms
Households
and GDP identity:
Export and import
in general
GDPt = Ct + It + Gt + Xt − PtIM IMt equilibrium models
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Macroeconomics II
Dániel Baksa
Introduction
Ricardian model
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