International Economics and International
Economic Organizations
Introduction
1. International economics: a global public goods
approach
Private goods are produced by market mechanism, supply demand determine
price of the good. -> these are: excludable (if u don’t pay market price, u are
excluded from having the good) and rivalrous (if I assume the good, it’s not
available for others to consume). Public goods are not excludable and non-rivalry.
Quasi-public goods/’joint goods’
- Joint products: can be produced by market mechanisms but have
public characteristics; for example, public transport
- Quasi-public goods: only has one of the two characteristics, but
not both
Global public goods -> in an international context.
- Non-exclusion: when this good is produced, it can’t
be excluded to individuals from enjoying its
benefits
- Non-rivalry in consumption: everyone can enjoy the good in
equal terms
o My consumption doesn’t change your ability to enjoy the
good
Basic problem -> free-riders problem. Public intervention/mechanism is needed
for the producing this public good instead of the market mechanism
- Market mechanisms cannot provide these goods, but no one is
prepared to pay for public goods
- You cannot rely on the free will of the people to pay for these
goods.
- Example: clean breathable air
- Solution: regulations, rules, and institutions
o We regulate market behavior in such a way that the public
good is produced in desirable quantities.
o The government (public sector) intervenes and uses tax
money to guarantee the needed quantities of the public
good
This is internationally relevant because air and pollution are not stopping at the
national border but potential problem of free riding but between states this time.
Need for public interventions at the global level instead of national level.
Public goods have become global public goods bcs of globalization. Eg
globalization of movement of people.
1
,Technologies of provision -> the way individual contribution of counties &
persons are transferred to the global provision of a good
Summation: relationship between individual efforts and the aggregate efforts, in
terms of adding to the supply of GPG
- The sum of all the individual contribution
- Eg initiatives to reduce pollution. They do this through policy advice which
states that everyone matters, so that everyone should put more efforts.
- Policy consequences: everyone matters; the more you do, the better
the results
Weakest link: you are just as strong as your weakest link
- Alternative technology that is the correct technology for some global public
goods.
- Eg all of us are stuck on an island, and we have our own individual plot of
land with coastal area, we know what our land is, where it begins and
ends, but there are no borders (see globalization), you can move from one
part to another part. The major threat to cure -> when the sea levels are
rising, to protect from this, build dykes each individually. Some will build
high and strong and some will build weak or no dams. So different levels of
contribution. Will our joint protection against flooding be determined by the
summation of our individual effort? No, I can do huge effort and my
neighbor can do nothing -> no mutual equal effort. Trouble will start from
the weakest link (my neighbor) and it will flood the whole island, also my
part.
o The contribution of protection depends on the contribution of the
weakest link.
- Policy consequence of understanding this: targeting the weakest links and
not everyone. If the weakest links increase, this will increase the global
supply.
Best shot: the aggregate effect is determined by the effort of the one with the
highest contributions
- The highest contribution counts.
- Eg tropical diseases for which there are no cure and the market
(pharmaceuticals) are not interested in finding a vaccine because people
have no purchasing power because of the rareness of the disease. The
market mechanism doesn’t work on this, so a health org (eg WHO) will find
a vaccine for that and fund this. What is the most efficient way to spend
this money to make sure the medicine is found? Giving the money to the
best shot institution: the one who has the best track record of finding a
vaccine or medicine to this illness.
- Policy consequences: direct resources to the best/strongest
Application to international economics and institutions. It is rational to
have global institutions because what they are established for is the supply of a
range of global public goods, and for the freeriders problem you do not rely on
the market but on the public global institutions.
2
,International financial stability: public intervention is needed to prevent a
financial crisis -> cross border transactions, there are strong ties in different
financial sectors so a crisi in 1 country can spillover to other countries and will
evoke a global financial crisis. Technology of production: where does a crisis start
-> where the protection is the least regulated. Then it will spillover to the rest of
the world.
Optimal capital provision: worldwide you want a global allocation of private
capital of firms, people,… which have a lot of money to those countries with a
shortage of savings. This money can stimulate development in the poorer
countries. Money is not moving worldwide to those countries who need it ->
market mechanism is not reliable. Public intervention here is to send aid and
developed systems to underdeveloped countries which have a global public good.
Or you create a public institution like the World Bank, its mandate is to make sure
the countries which are lacking or difficulties can have the funds.
2. The concept of the balance of payments
Balance of payments represents all the transactions of finance, goods, services,
income, businesses, government,… on a yearly basis of the incoming and
outgoing transactions across borders.
Current acc + capital (and financial) acc = 0
- Current account openness: liberalization/openness = a country policy
decision to put yourself open to receive these transactions and allow your
citizens to do the same but outgoing.
- Capital account openness: a country allows cross-border financial
transactions (foreign investments, loans, etc.) -> split in 2
o Capital account
o Financial account: all the flows in the capital account are now
found in financial account
The BoP always sums to 0 because of double entry-booking. Every single
crossborder transaction gives rise to 2 entries in the BoP: credit and debit entry
with same number but different sign (+-).
- Eg is trade: export import. Export transaction -> the good is leaving and
money comes in. both will be the same number but different sign and
sums to 0.
o Tanzania exports coffee and receives money, but not in the same
currency because Tanzania’s currency is not accepted because it has
no international purchasing power. They get paid in dollar or other
currencies but very limited currencies.
o Foreign exchange refers to dollar, the most used currency is the
dollar. All the transactions Tanzania makes is not in their own
currency, the Central Bank cannot print their currency and they
cannot print dollars in their country. You get dollars by exporting
your own goods, the coffee they make.
o They can only pay for the import transaction to the extend how
much they export. Export is +
GENERAL RULE:
3
, Everything leading to foreign exchange (forex) inflows is +, so foreign exchange
inflow itself is – (export)
Minus sign is good, this means that money is coming in -> goods come in, money leaves the country
Everything leading to foreign exchange (forex) outflows is -, so foreign exchange
outflow itself is + (import)
Import leads to foreign exchange outflows, so import is put with a minus -> goods leave the country,
money comes in
- Credit (+): export, income and current transfers received,
decrease of foreign assets, increase of foreign liabilities
- Debit (-): import, income and current transfers paid, increase of
foreign assets, decrease of foreign liabilities
Subparts can have non-zero balances, but everything together needs to be 0.
Current account:
1. Trade balance: export + and import –, see rule -> this makes the trade
balance -> this is negative, so there is a trade balance deficit because
exports are smaller than imports. A surplus would mean the opposite.
a. Net exports of goods and services: sum of import and export
i. 500 exported and 800 imported 500 – 800 = -300
ii. Deficit is bad, surplus is good
iii. We import more than we export
iv. Trade balance deficit: we lose reserve; we pay more than
we earn from export
v. Foreign exchange reserves of a country is historically
build up, looked after by the Central Bank (CB). This is
how a country can pay more than receive money
vi. Counterpart: nr. 11
2. Net income received from abroad -> 2 types of border transactions:
a. compensation of employees -> people who are working in a different
country from whom they live and they generate a crossborder
transaction.
b. Investment income: the interest payments on a foreign loan
from another country. Not the loan itself, but the interest you
pay on the loan. Equity capital, if you get a return on shares from a
company in a different country -> dividend payments.
i. Mostly negative for developing country because they pay
more interests.
ii. Here the minus is negative, money leaving the country
iii. Counterpart nr. 11: positive sign means money leaving
the country
3. Net current transfers: official development aid in the form of a grant,
workers remittances -> workers sent money back to their family,… This is
in positive, this country is receiving more aid/remittances/… than its
sending out
a. Sum of 1 – 3: -300 + (-100) + 150 = -250
i. Deficit is negative: still losing foreign exchange
4
Economic Organizations
Introduction
1. International economics: a global public goods
approach
Private goods are produced by market mechanism, supply demand determine
price of the good. -> these are: excludable (if u don’t pay market price, u are
excluded from having the good) and rivalrous (if I assume the good, it’s not
available for others to consume). Public goods are not excludable and non-rivalry.
Quasi-public goods/’joint goods’
- Joint products: can be produced by market mechanisms but have
public characteristics; for example, public transport
- Quasi-public goods: only has one of the two characteristics, but
not both
Global public goods -> in an international context.
- Non-exclusion: when this good is produced, it can’t
be excluded to individuals from enjoying its
benefits
- Non-rivalry in consumption: everyone can enjoy the good in
equal terms
o My consumption doesn’t change your ability to enjoy the
good
Basic problem -> free-riders problem. Public intervention/mechanism is needed
for the producing this public good instead of the market mechanism
- Market mechanisms cannot provide these goods, but no one is
prepared to pay for public goods
- You cannot rely on the free will of the people to pay for these
goods.
- Example: clean breathable air
- Solution: regulations, rules, and institutions
o We regulate market behavior in such a way that the public
good is produced in desirable quantities.
o The government (public sector) intervenes and uses tax
money to guarantee the needed quantities of the public
good
This is internationally relevant because air and pollution are not stopping at the
national border but potential problem of free riding but between states this time.
Need for public interventions at the global level instead of national level.
Public goods have become global public goods bcs of globalization. Eg
globalization of movement of people.
1
,Technologies of provision -> the way individual contribution of counties &
persons are transferred to the global provision of a good
Summation: relationship between individual efforts and the aggregate efforts, in
terms of adding to the supply of GPG
- The sum of all the individual contribution
- Eg initiatives to reduce pollution. They do this through policy advice which
states that everyone matters, so that everyone should put more efforts.
- Policy consequences: everyone matters; the more you do, the better
the results
Weakest link: you are just as strong as your weakest link
- Alternative technology that is the correct technology for some global public
goods.
- Eg all of us are stuck on an island, and we have our own individual plot of
land with coastal area, we know what our land is, where it begins and
ends, but there are no borders (see globalization), you can move from one
part to another part. The major threat to cure -> when the sea levels are
rising, to protect from this, build dykes each individually. Some will build
high and strong and some will build weak or no dams. So different levels of
contribution. Will our joint protection against flooding be determined by the
summation of our individual effort? No, I can do huge effort and my
neighbor can do nothing -> no mutual equal effort. Trouble will start from
the weakest link (my neighbor) and it will flood the whole island, also my
part.
o The contribution of protection depends on the contribution of the
weakest link.
- Policy consequence of understanding this: targeting the weakest links and
not everyone. If the weakest links increase, this will increase the global
supply.
Best shot: the aggregate effect is determined by the effort of the one with the
highest contributions
- The highest contribution counts.
- Eg tropical diseases for which there are no cure and the market
(pharmaceuticals) are not interested in finding a vaccine because people
have no purchasing power because of the rareness of the disease. The
market mechanism doesn’t work on this, so a health org (eg WHO) will find
a vaccine for that and fund this. What is the most efficient way to spend
this money to make sure the medicine is found? Giving the money to the
best shot institution: the one who has the best track record of finding a
vaccine or medicine to this illness.
- Policy consequences: direct resources to the best/strongest
Application to international economics and institutions. It is rational to
have global institutions because what they are established for is the supply of a
range of global public goods, and for the freeriders problem you do not rely on
the market but on the public global institutions.
2
,International financial stability: public intervention is needed to prevent a
financial crisis -> cross border transactions, there are strong ties in different
financial sectors so a crisi in 1 country can spillover to other countries and will
evoke a global financial crisis. Technology of production: where does a crisis start
-> where the protection is the least regulated. Then it will spillover to the rest of
the world.
Optimal capital provision: worldwide you want a global allocation of private
capital of firms, people,… which have a lot of money to those countries with a
shortage of savings. This money can stimulate development in the poorer
countries. Money is not moving worldwide to those countries who need it ->
market mechanism is not reliable. Public intervention here is to send aid and
developed systems to underdeveloped countries which have a global public good.
Or you create a public institution like the World Bank, its mandate is to make sure
the countries which are lacking or difficulties can have the funds.
2. The concept of the balance of payments
Balance of payments represents all the transactions of finance, goods, services,
income, businesses, government,… on a yearly basis of the incoming and
outgoing transactions across borders.
Current acc + capital (and financial) acc = 0
- Current account openness: liberalization/openness = a country policy
decision to put yourself open to receive these transactions and allow your
citizens to do the same but outgoing.
- Capital account openness: a country allows cross-border financial
transactions (foreign investments, loans, etc.) -> split in 2
o Capital account
o Financial account: all the flows in the capital account are now
found in financial account
The BoP always sums to 0 because of double entry-booking. Every single
crossborder transaction gives rise to 2 entries in the BoP: credit and debit entry
with same number but different sign (+-).
- Eg is trade: export import. Export transaction -> the good is leaving and
money comes in. both will be the same number but different sign and
sums to 0.
o Tanzania exports coffee and receives money, but not in the same
currency because Tanzania’s currency is not accepted because it has
no international purchasing power. They get paid in dollar or other
currencies but very limited currencies.
o Foreign exchange refers to dollar, the most used currency is the
dollar. All the transactions Tanzania makes is not in their own
currency, the Central Bank cannot print their currency and they
cannot print dollars in their country. You get dollars by exporting
your own goods, the coffee they make.
o They can only pay for the import transaction to the extend how
much they export. Export is +
GENERAL RULE:
3
, Everything leading to foreign exchange (forex) inflows is +, so foreign exchange
inflow itself is – (export)
Minus sign is good, this means that money is coming in -> goods come in, money leaves the country
Everything leading to foreign exchange (forex) outflows is -, so foreign exchange
outflow itself is + (import)
Import leads to foreign exchange outflows, so import is put with a minus -> goods leave the country,
money comes in
- Credit (+): export, income and current transfers received,
decrease of foreign assets, increase of foreign liabilities
- Debit (-): import, income and current transfers paid, increase of
foreign assets, decrease of foreign liabilities
Subparts can have non-zero balances, but everything together needs to be 0.
Current account:
1. Trade balance: export + and import –, see rule -> this makes the trade
balance -> this is negative, so there is a trade balance deficit because
exports are smaller than imports. A surplus would mean the opposite.
a. Net exports of goods and services: sum of import and export
i. 500 exported and 800 imported 500 – 800 = -300
ii. Deficit is bad, surplus is good
iii. We import more than we export
iv. Trade balance deficit: we lose reserve; we pay more than
we earn from export
v. Foreign exchange reserves of a country is historically
build up, looked after by the Central Bank (CB). This is
how a country can pay more than receive money
vi. Counterpart: nr. 11
2. Net income received from abroad -> 2 types of border transactions:
a. compensation of employees -> people who are working in a different
country from whom they live and they generate a crossborder
transaction.
b. Investment income: the interest payments on a foreign loan
from another country. Not the loan itself, but the interest you
pay on the loan. Equity capital, if you get a return on shares from a
company in a different country -> dividend payments.
i. Mostly negative for developing country because they pay
more interests.
ii. Here the minus is negative, money leaving the country
iii. Counterpart nr. 11: positive sign means money leaving
the country
3. Net current transfers: official development aid in the form of a grant,
workers remittances -> workers sent money back to their family,… This is
in positive, this country is receiving more aid/remittances/… than its
sending out
a. Sum of 1 – 3: -300 + (-100) + 150 = -250
i. Deficit is negative: still losing foreign exchange
4
