Interdependence in the World Economy
Table 17.6 shows the effect of an autonomous increase in government expenditures on gross national product (GNP), consumer price index (CPI), interest rate, currency value, and current account in the nation or group of nations where the increase in government expenditures takes place, and their repercussions on the trade partner(s). These simulation results were obtained using the Multi-Country Model of the Federal Reserve Board. Although the effects of an increase in government expenditures are felt over several years, the results reported in Table 17.6 show the effect in the second year after government expenditures increased. Part A of the table shows the effect of an increase in U.S. government expenditures of 1 percent on the United States and on the rest of the OECD. OECD refers to the Organization for Economic Cooperation and Development, which included all 24 of the worldĂ˘â‚¬â„˘s industrial countries at the time of the exercise. Part A of the table shows that the increase in U.S. government expenditures equal to 1 percent of its GNP results (through the multiplier process) in an increase of 1.8 percent in the U.S. GNP in the second year after the United States increased its expenditures. A longer period of time would show a larger total effect. It also leads to a 0.4 percent increase in U.S. prices, a 1.7 percentage point increase (say from 4 percent to 5.7 percent) in U.S. short-term interest rates, a 2.8 percent increase in the international value of the dollar (appreciation), and a (Ă˘Ë†â€™)$16.5 billion deterioration in the U.S. current account balance. The dollar appreciates because the increase in capital inflows attracted by the increase in the U.S. interest rate exceeds the induced rise in imports resulting from the increase in U.S. GNP. The top right part of the table shows that the increase in U.S. imports resulting from the increase in its expenditures and income stimulates the growth of GNP in the rest of OECD by 0.7 percent. This, in turn, leads to an increase of 0.4 percent in prices and a 0.4 percentage point increase in short-term interest rates in the other
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OECD countries. The appreciation of the dollar means a depreciation of the currencies of the other OECD countries and an improvement of $8.9 billion in their current account balance. The average depreciation of the other OECD countries was not estimated, and the improvement in their current account is smaller than the increase in the U.S. current account deficit because a great deal of U.S. imports also come from OPEC (Organization of Petroleum Exporting Countries) and LDCs (less developed countries). Part B of the table shows that an autonomous increase in government expenditures in the rest of OECD would lead to a 1.4 percent increase in their average GNP, a 0.3 percent increase in prices, a 0.6 percentage point increase in shortterm interest rates, a 0.3 percent appreciation of their currencies, and a (Ă˘Ë†â€™)$7.2 billion deterioration in the current account balance. These changes have repercussions in the United States, where GNP increases by 0.5 percent, prices increase by 0.2 percent, short-term interest rates increase by 0.5 percentage points, and the U.S. current account improves by $7.9 billion. Other models of the world economy give similar results (see McKibbin, 1997). The strong interdependence in the world economy today could also be shown by other changes taking place in the United States or in its trade partners.