International Corporate Finance The Balance of Payments Xin Chen Visiting Associate Professor Aarhus School of Business
1 International Corporate Finance The Balance of Payments Xin Chen Visiting Associate Professor Aarhus School of Business
Trade,war between China and US? On Friday evening in Washington,President Barack Obama announced that the United States would levy tariffs of up to 35 percent on tires from China.China exported $1.3 billion in tires to the United States in the first seven months of 2009. China's commerce ministry announced Sunday that it would investigate "certain imported automotive products and certain imported chicken meat products originating from the United States"to determine if they were being subsidized or "dumped" below cost in the Chinese market.US shipped about $800 million in automotive products and $376 million in chicken meat to China The trade deficit of US with China was a record $268 billion in 2008
Trade war between China and US? On Friday evening in Washington, President Barack Obama announced that the United States would levy tariffs of up to 35 percent on tires from China. China exported $1.3 billion in tires to the United States in the first seven months of 2009. China’s commerce ministry announced Sunday that it would investigate “certain imported automotive products and certain imported chicken meat products originating from the United States” to determine if they were being subsidized or “dumped” below cost in the Chinese market. US shipped about $800 million in automotive products and $376 million in chicken meat to China The trade deficit of US with China was a record $268 billion in 2008
Why do trade between countries exist? Absolute and comparative advantages provide a basis for explaining and justifying international trade. Absolute advantage:when a country is able to produce goods or services with fewer resources than another country. Comparative advantage:when a country is able to produce goods or services at a lower opportunity cost than another country
Why do trade between countries exist? Absolute and comparative advantages provide a basis for explaining and justifying international trade. Absolute advantage: when a country is able to produce goods or services with fewer resources than another country. Comparative advantage: when a country is able to produce goods or services at a lower opportunity cost than another country
Example:Absolute advantage The table shows the production capacity per production unit. Germany has an absolute advantage in producing cars. Denmark has an absolute advantage in producing wind turbines. Wind turbines Cars Denmark 6 2 Germany 3 6
Example: Absolute advantage The table shows the production capacity per production unit. Germany has an absolute advantage in producing cars. Denmark has an absolute advantage in producing wind turbines. Wind turbines Cars Denmark 6 2 Germany 3 6
Example:Absolute advantage Denmark uses 3 production units to produce wind turbines and 7 production units to produce cars. Assume the same for Germany. Wind turbines Cars Denmark 3 x 6 18 7x 2 14 Germany 3x 3 9 7x6 =42 Total 27 56
Example: Absolute advantage Denmark uses 3 production units to produce wind turbines and 7 production units to produce cars. Assume the same for Germany. Wind turbines Cars Denmark 3 x 6 = 18 7 x 2 = 14 Germany 3 x 3 = 9 7 x 6 = 42 Total 27 56
Example:Absolute advantage Now assume complete specialization. Wind turbines Cars Denmark 10×6=60 0X2=0 Germany 0X3= 0 10X6=60 Total 60 60
Example: Absolute advantage Now assume complete specialization. Wind turbines Cars Denmark 10 x 6 = 60 0 x 2 = 0 Germany 0 x 3 = 0 10 x 6 = 60 Total 60 60
Example:Comparative advantage The table shows the production capacity per production unit. Germany has an absolute advantage in producing both wind turbines and cars. 袋 Germany has a comparative advantage in producing cars. Wind turbines Cars Denmark 2 2 Germany 3 6
Example: Comparative advantage The table shows the production capacity per production unit. Germany has an absolute advantage in producing both wind turbines and cars. Germany has a comparative advantage in producing cars. Wind turbines Cars Denmark 2 2 Germany 3 6
Example:Comparative advantage Denmark uses 3 production units to produce wind turbines and 7 production units to produce cars. Assume the same for Germany. Wind turbines Cars Denmark 3 x 2 6 7×2=14 Germany 3 x 3 9 7×6=42 Total 15 56
Example: Comparative advantage Denmark uses 3 production units to produce wind turbines and 7 production units to produce cars. Assume the same for Germany. Wind turbines Cars Denmark 3 x 2 = 6 7 x 2 = 14 Germany 3 x 3 = 9 7 x 6 = 42 Total 15 56
Example:Comparative advantage Now assume complete specialization. Wind turbines Cars Denmark 10×2=20 0X2=0 Germany 0X3= 0 10X6=60 Total 20 60
Example: Comparative advantage Now assume complete specialization. Wind turbines Cars Denmark 10 x 2 = 20 0 x 2 = 0 Germany 0 x 3 = 0 10 x 6 = 60 Total 20 60
The Balance of Payments International business transactions occur in many different forms over the course of a year The measurement of all international economic transactions between the residents of a country and foreign residents is called the balance of payments (BOP)
The Balance of Payments International business transactions occur in many different forms over the course of a year The measurement of all international economic transactions between the residents of a country and foreign residents is called the balance of payments (BOP)