International Economics
Lecture 1
International economics studies the economic interactions among different
nations, which make up the global economy. Secondly it studies how inhabitants
of nations interact through the flow of trade and the flow of money and
investments.
There are two fields in international economics:
International finance (open economy macroeconomics/ international
monetary economics): exchange rates, capital flows, current account
imbalances, currencies (money, foreign exchange), international policy
coordination.
International trade: physical movement of goods and services (why
trade?), where to locate production? (export or FDI), the role of trade policy
by governments
Gross Domestic Product (GDP) measures the final value of all goods and
services that are produced within a country in a given time period.
Gross National Product (GNP) is the value of all goods and services produced
by nations factors of production in a given time period.
Factors of production: Land, Capital, Labor, Entrepreneurship
GDP = GNP - payments for home factors of productions but produced abroad +
payments for foreign factors of production but produced at home.
GNP is calculated by adding the value of expenditure on final goods and services
produced.
There are 4 types of expenditures:
1. Investment
2. Government spending/purchases
3. Consumption
4. Current account balance (export - import)
Ex post national income identity:
National income = Y = C + I + G + CA = expenditure on domestic
production (who bought domestic products)
- Final products not purchased by households or government are
counted as inventory investment by firms.
Keynesian Cross analysis:
- Supply = domestic production = Y = AD (Aggregated demand) = C
+ I + G + EX – IM
Alternative representation of the national income identity:
National income/production + imports = expenditures at home + abroad
(goods/services available in Home country)
- Y + IM = C + I + G + EX
1
,EX – IM has two meanings, so do not get confused on the test:
1. In the Current Account it means net expenditure by foreign individuals and
institutions which includes, for instance, interest payments for debt /
foreign capital.
2. In the Trade Balance it means exports and imports of goods and services.
Net Foreign Assets: the total value of a country's foreign assets minus the total
value of assets within a country that are owned by foreigners
When production is bigger than the domestic expenditure (C + I + G) then
exports are bigger than imports, which leads to a positive current account (CA
surplus) and most likely also a positive trade balance. Moreover, when a country
exports more than it imports, it earns more income from exports than it spends
on imports. This leads to an increase in the net foreign assets.
National saving (S) = national income that is not spent on consumption or
government purchases.
- S=Y–C–G
- = (Y – C – T) + (T – G)
- = Sp + S g
We already know:
- CA = EX – IM = Y – (C + I + G)
Simplify:
- = (Y – C – G) – I
- =S–I
Current account = national saving – investment
Current account = change in net foreign assets = net foreign investment
This means that when exports are smaller than the imports (CA<0) Savings
are lower than the Investments and vice versa.
Twin Deficit refers to economies that have both a fiscal deficit (nation’s
spending exceeds revenue) and current account deficit (overseas spending
exceeds revenue).
A firm’s balance sheet: profit and loss account reports profits and losses from
the firm’s activities / changes in net worth resulting from changes in assets,
liabilities.
Balance of Payments: flow of all payments for transactions conducted between
home country and the rest of the world. In other words, it accounts for its
payments to and its receipts from foreigners during a certain period.
BoP: CA + Financial Account = errors (should be 0)
2
,The Balance of Payments provides information on nations profit or loss account
(current account) and the resulting change in a country’s net worth (compare
with a firm’s balance sheet). It accounts for its payments to and its receipts from
foreigners during a certain period.
Each international transaction enters the accounts twice: once as a credit item
(+) and once as a debit item (-). Due to the double entry of each transaction, the
balance of payments accounts will balance by the following equation:
- Current account + Financial account + Capital account = 0
The three main accounts on the Balance of Payments:
1. Current account
- Imports and exports of merchandise and services.
- Receipts and payments of factor income (when you work or invest
abroad) and Unilateral transfers.
2. Financial account
- accounts for flows of financial assets. It includes the difference
between sales of domestic assets to foreigners and purchases of
foreign assets by domestic citizens.
- Types of financial flows portfolio investment and foreign
direct investment (FDI); capital flow to a country to create or
expand production abroad.
- Two major components of the financial account FA non
reserve portion and FA reserve portion; foreign assets held by
central banks to cushion against financial instability, also to
prevent exchange rate movements, examples government
bonds, currency, gold etc..
3. Capital account
- records special transfers of assets.
Examples of a BoP:
You import a DVD of a Japanese computer game by using your debit card. The
Japanese producer of the computer game deposits the money in its bank account
in San Francisco. The bank credits the account by the amount of the deposit.
You buy a share of British Petroleum (BP). BP deposits the money in a U.S. bank.
!both are financial account!
3
, The level of net central bank financial flows is called the official settlements
balance or ‘balance of payments’.
It is equal to the sum of:
- CA + FA (non-reserve) + Statistical discrepancy
Lecture 2
Exchange rates are quoted as foreign currency per unit of domestic currency, or
domestic currency per unit of foreign currency. So, how much domestic currency
is needed for one unit of foreign currency?
Exchange rates allow us to denominate the cost or price of a good or service in a
common currency.
Bilateral nominal exchange rate:
- e = ? / 1[ $ / ¥] (or [ $ / €])[home currency / foreign currency]
An example:
How many dollars can be exchanged for one euro? €1/$1.11
then the price of the $ is € 90 cents
the exchange rate (e) is € 0.9/$1 = 0.9
Devaluation: official lowering of value of currency
Depreciation: lower value of currency occurring in the market
Revaluation: official raising of value of currency
Appreciation: higher value of currency occurring in the market
Spot rates are exchange rates for currency exchanges “on the spot”, or at the
moment of trade. So, those are the exchange rates when trading is executed in
the present.
Forward rates are exchange rates that will occur at a future date but are
negotiated in the present by two parties. The forward dates are typically
30,90,180 or 360 days in the future.
Real exchange rate: how many domestic goods are needed for one foreign
good?
- q = e p*/p
Real depreciation (q↑): domestic goods relatively less valuable (cheaper)
relative to foreign goods.
Competitiveness ↑ export ↑ and import ↓
4
Lecture 1
International economics studies the economic interactions among different
nations, which make up the global economy. Secondly it studies how inhabitants
of nations interact through the flow of trade and the flow of money and
investments.
There are two fields in international economics:
International finance (open economy macroeconomics/ international
monetary economics): exchange rates, capital flows, current account
imbalances, currencies (money, foreign exchange), international policy
coordination.
International trade: physical movement of goods and services (why
trade?), where to locate production? (export or FDI), the role of trade policy
by governments
Gross Domestic Product (GDP) measures the final value of all goods and
services that are produced within a country in a given time period.
Gross National Product (GNP) is the value of all goods and services produced
by nations factors of production in a given time period.
Factors of production: Land, Capital, Labor, Entrepreneurship
GDP = GNP - payments for home factors of productions but produced abroad +
payments for foreign factors of production but produced at home.
GNP is calculated by adding the value of expenditure on final goods and services
produced.
There are 4 types of expenditures:
1. Investment
2. Government spending/purchases
3. Consumption
4. Current account balance (export - import)
Ex post national income identity:
National income = Y = C + I + G + CA = expenditure on domestic
production (who bought domestic products)
- Final products not purchased by households or government are
counted as inventory investment by firms.
Keynesian Cross analysis:
- Supply = domestic production = Y = AD (Aggregated demand) = C
+ I + G + EX – IM
Alternative representation of the national income identity:
National income/production + imports = expenditures at home + abroad
(goods/services available in Home country)
- Y + IM = C + I + G + EX
1
,EX – IM has two meanings, so do not get confused on the test:
1. In the Current Account it means net expenditure by foreign individuals and
institutions which includes, for instance, interest payments for debt /
foreign capital.
2. In the Trade Balance it means exports and imports of goods and services.
Net Foreign Assets: the total value of a country's foreign assets minus the total
value of assets within a country that are owned by foreigners
When production is bigger than the domestic expenditure (C + I + G) then
exports are bigger than imports, which leads to a positive current account (CA
surplus) and most likely also a positive trade balance. Moreover, when a country
exports more than it imports, it earns more income from exports than it spends
on imports. This leads to an increase in the net foreign assets.
National saving (S) = national income that is not spent on consumption or
government purchases.
- S=Y–C–G
- = (Y – C – T) + (T – G)
- = Sp + S g
We already know:
- CA = EX – IM = Y – (C + I + G)
Simplify:
- = (Y – C – G) – I
- =S–I
Current account = national saving – investment
Current account = change in net foreign assets = net foreign investment
This means that when exports are smaller than the imports (CA<0) Savings
are lower than the Investments and vice versa.
Twin Deficit refers to economies that have both a fiscal deficit (nation’s
spending exceeds revenue) and current account deficit (overseas spending
exceeds revenue).
A firm’s balance sheet: profit and loss account reports profits and losses from
the firm’s activities / changes in net worth resulting from changes in assets,
liabilities.
Balance of Payments: flow of all payments for transactions conducted between
home country and the rest of the world. In other words, it accounts for its
payments to and its receipts from foreigners during a certain period.
BoP: CA + Financial Account = errors (should be 0)
2
,The Balance of Payments provides information on nations profit or loss account
(current account) and the resulting change in a country’s net worth (compare
with a firm’s balance sheet). It accounts for its payments to and its receipts from
foreigners during a certain period.
Each international transaction enters the accounts twice: once as a credit item
(+) and once as a debit item (-). Due to the double entry of each transaction, the
balance of payments accounts will balance by the following equation:
- Current account + Financial account + Capital account = 0
The three main accounts on the Balance of Payments:
1. Current account
- Imports and exports of merchandise and services.
- Receipts and payments of factor income (when you work or invest
abroad) and Unilateral transfers.
2. Financial account
- accounts for flows of financial assets. It includes the difference
between sales of domestic assets to foreigners and purchases of
foreign assets by domestic citizens.
- Types of financial flows portfolio investment and foreign
direct investment (FDI); capital flow to a country to create or
expand production abroad.
- Two major components of the financial account FA non
reserve portion and FA reserve portion; foreign assets held by
central banks to cushion against financial instability, also to
prevent exchange rate movements, examples government
bonds, currency, gold etc..
3. Capital account
- records special transfers of assets.
Examples of a BoP:
You import a DVD of a Japanese computer game by using your debit card. The
Japanese producer of the computer game deposits the money in its bank account
in San Francisco. The bank credits the account by the amount of the deposit.
You buy a share of British Petroleum (BP). BP deposits the money in a U.S. bank.
!both are financial account!
3
, The level of net central bank financial flows is called the official settlements
balance or ‘balance of payments’.
It is equal to the sum of:
- CA + FA (non-reserve) + Statistical discrepancy
Lecture 2
Exchange rates are quoted as foreign currency per unit of domestic currency, or
domestic currency per unit of foreign currency. So, how much domestic currency
is needed for one unit of foreign currency?
Exchange rates allow us to denominate the cost or price of a good or service in a
common currency.
Bilateral nominal exchange rate:
- e = ? / 1[ $ / ¥] (or [ $ / €])[home currency / foreign currency]
An example:
How many dollars can be exchanged for one euro? €1/$1.11
then the price of the $ is € 90 cents
the exchange rate (e) is € 0.9/$1 = 0.9
Devaluation: official lowering of value of currency
Depreciation: lower value of currency occurring in the market
Revaluation: official raising of value of currency
Appreciation: higher value of currency occurring in the market
Spot rates are exchange rates for currency exchanges “on the spot”, or at the
moment of trade. So, those are the exchange rates when trading is executed in
the present.
Forward rates are exchange rates that will occur at a future date but are
negotiated in the present by two parties. The forward dates are typically
30,90,180 or 360 days in the future.
Real exchange rate: how many domestic goods are needed for one foreign
good?
- q = e p*/p
Real depreciation (q↑): domestic goods relatively less valuable (cheaper)
relative to foreign goods.
Competitiveness ↑ export ↑ and import ↓
4
