We're starting now the third week of this class of analyzing global trends for business and society. After reviewing population trends and trends in terms of income and wealth distribution and inequality around the world in the first two weeks. Now, we're going to examine something that is attracting a lot of attention in the world, which is the issue of global economic and financial imbalances. We're going to try to understand how the dynamics in the global economy are affecting different countries and their relationships with one another. And we're also going to be taking a very close look at two specific situations where we see very important implications of these imbalances. One is the European crisis and the other one is the bilateral relationship between the United States and China. Before we get started, I would like to make two basic considerations here. The first is that remember that if a country exports more than what it imports, than that county is a surplus county. However, if a county exports less than what it imports, then that country is a deficit county. Now, also keep in mind that if a country runs a surplus, that necessarily means that at least one other country in the world must be running a deficit. This, of course, only true in the context of inter-planetary trade that is exactly zero. That is to say, all trade takes place within planet earth. Once again, if a country has a surplus that means that there must be at least one other country that has a deficit. Now, let's take a look at the first chart that I have prepared for you. This chart shows us the magnitude of global imbalances in the world since the year 1980. The data are actual recorded data until the year 2015. And between 2016 and the year 2020, we have projections or forecasts as to the magnitude and the distribution of global imbalances by the International Monetary Fund. What we see is the following, above the zero line we find the countries or the parts of the world that have a surplus because they export more goods and services than what they import. Those countries are China, Germany, Japan. Some other countries in Europe such as the Netherlands or Switzerland that also have a surplus. Or other countries in Asia, such as South Korea or Taiwan. And then, finally, we have about 20 or 25 oil exporting economies, that also enjoy surpluses in their trade relationships with the rest of the world. And below the zero line, we have the countries that have a deficit. First and foremost, we have the United States and then of course we have a large number of countries in Europe that also ran deficits. And the rest of the world category includes about 100 countries, most of them relatively poor in the world that also have deficits. Now, one very important point that I want to make is that please take into account that having a deficit in trade is not necessarily a bad thing. It really depends on whether you can find enough money to fund your deficit or not. Now, what's important about this chart is the vertical dimension. The vertical dimensions comes expressed in percentage points of global GDP, global gross domestic product. And one can clearly or more or less clearly see that back in the 1980s and 1990s, the magnitude, the size of both the surpluses and deficits in the world were basically within plus or minus 1% in terms of global GDP. Now, something happened around the year 2000, and the size of both the deficits and the surpluses became much bigger twice even three times as big. By the time of the crisis in 2008, the magnitude of the deficits and the surpluses became a little bit smaller, but it recovered. And today, and into the foreseeable future, they will continue to be much bigger than they were back in the 1980s and the 1990s. So let's take a look now at one particular year. What we have here is the data for the year 2013. On the left, we have the surplus countries and on the right we have the deficit countries. What we have here is surplus and deficit countries in terms of their current accounts. That's a technical term which essentially includes all exports and imports of goods and services and then certain types of transfers. What we find on the left, is that in that year, Germany was a country in the world with the largest trade surplus, current account surplus that is. Followed by China and then Saudi Arabia, Switzerland, the Netherlands and so on. And on the right hand side, we find that in that year, the US was running the largest deficit, followed by the UK, Brazil, Turkey, Canada, Australia and so on. Now, here's the key question that I would like to pose. If the countries on the right hand side, the deficit countries, year in and year out, they're buying from the rest of the world more than what they sell to other countries. That is to say they export less than what they import, how do they pay their bills, right? Because every year they're purchasing from aboard more than what they sell to the rest of the world. Well, once again given that we had no inter-planetary trade. The only possibility here is that the surplus countries on the left are the ones who are giving the money to the deficit countries. So that they can continue to run a deficit. The money must necessarily come from the surplus countries. And the surplus countries, of course, know very well that in order for them to enjoy a surplus. They need to provide the deficit countries with enough financing so that they can continue to purchase their goods and services. That's how the global economy works. Now, naturally, the surplus countries don't give the deficit countries the money without any strings attached. Typically, what happens is that the deficit countries borrow the money and therefore year after year they're deeper into debt. One very common way of making this work is for the deficit countries to sell government bonds to the surplus countries. Such as the one that you see here on the screen which is a US Treasury bond.