International Monetary Economics
CHAPTER 1: INTRODUCTION
What you need to know and which skills you need for the exam
In general
Belgium has an important open economy
-> has a very high rate of import/export ratio
In 2022, there was a high inflation (almost globally)
-> most of the countries tries to keep the inflation rate
constant each year
ex. Belgium always tries to stay around 2% inflation
>2% = slows down the economy
<2% = expansion of the economy
How getting inflation lower?
Central banks can raise their interest rate to push down
the inflation
We are going to look at very different factors who have an impact on an economy
(are going to try to understand as much as possible of it)
1
, CHAPTER 2: NATIONAL INCOME ACCOUNTING AND THE BALANCE OF PAYMENTS
National Income Accounts (GNP)
national income = income earned by a nation’s factors of production
(there is a difference between GNP and GDP, but we are using both terms for the same thing)
-> we will look at the national income identity
logic behind it
producers earn income from buyers who spend money on goods and services
with other words
amount of expenditure by buyers = amount income for sellers = the value of production
We are going to decompose the GNP in 4 different components
(each component will be discussed in detail)
Y = C + I + G + CA
C: expenditure by domestic consumers
I: expenditure by firms on buildings and equipment
G: expenditure by governments on goods and services
CA: net expenditure by foreigners on domestic goods and services
! Important to know !
the national income identity is not fully correct
-> don’t take in account other possible disturbing factors
ex. Depreciations, transfers (gifts), some taxes…
Why are these components useful?
1. Can compose the relative size of the components for a country
(often we see that consumption is the biggest part)
2. Can use it to compare counties with each other
! keep in mind !
when analysing a figure, you need to make sure that you understand what is represented
Germany
growth mainly because of high rate of
exports
highly dependent on what is happening in
the economy!
France
main motor of growth is consumption
Best option?
in general, there is no better option
-> the best option is to have a balanced amount of each component
2
,Real life examples
Example 1: China (2007, 2009, 2013)
China has grown very fast (almost impossible to stay at that level of growth)
-> grow in GDP driven my investments mainly
-> since 2005 also export driven growth
-> very few consumption by households = unbalance
(lowest share of consumption in any significant economy ever)
lesson to learn
high exports, like Germany, Is not always a positive thing
it is dependent on the economic situation and time
Example 2: United States (2007-2009)
The American economy made a pivot after the financial crisis (crise
financière de 2008)
before the crisis
people felt rich and consumed a lot (saving close to 0%)
after the crisis
people began to consume less and save more (went up to almost 10%)
Example 3: Spain (2022)
GDP of Spain went up, even though consumption and investments has dropped
-> rise in GDP because of rise in net exports
reason
imports fell because of high inflation
(consumers could not afford to buy products from abroad anymore)
! the economy of Spain grew, but NOT in a good way !
Example 4: Russia (2014)
Russian’s GDP grew, even though there is a war
How is it possible?
military Keynesianism: government tries to improve the economy by raising military spendings
(G goes up)
Short summary
Y = C + I + G + CA -> we are going to rewrite the national identity and try to understand It more
domestic residents deeply
foreign residents
3
, National Income Accounting for an Open Economy
basic rule: NI = GNP
National income identity for closed economy
Y=C+I+G
National income identity for open economy
Y = C + I + G + (EX – IM)
Y = sales to domestic residents + sales to foreign residents
Y = C + I + G + CA
More about the Current Account
For the first time, we will rewrite the NI identity
-> are going to isolate CA
CA = Y – (C + I + G)
= national income – spending of residents
What can we say about the current account?
CA < 0 => current account deficit
more imports than exports (buy more from foreigners than you sell to them)
with other words
people are spending more than the income that they have, because uses more output than it
can produce
HOW?
-> can borrow money from the rest of the world (buitenlandse schuldenlast neemt toe)
-> can use your own savings if you have some
CA > 0 => current account surplus
spendings < income
are going to lend money to countries with a CA deficit
The current account is a measure for wealth
= the sum of all CA’s surplus/deficit in the history
! not only over a certain period of time !
𝛥foreign wealth = value of the assets that the country owns abroad
– value of domestic assets owned by foreigners
Examples
Example 1: America
The US is the world's biggest debtor
In the begin of the 80’s, US was a net creditor
BUT there surplus went down and US became a net debtor
expenses > income
-> the economy leans on borrowed money
4
CHAPTER 1: INTRODUCTION
What you need to know and which skills you need for the exam
In general
Belgium has an important open economy
-> has a very high rate of import/export ratio
In 2022, there was a high inflation (almost globally)
-> most of the countries tries to keep the inflation rate
constant each year
ex. Belgium always tries to stay around 2% inflation
>2% = slows down the economy
<2% = expansion of the economy
How getting inflation lower?
Central banks can raise their interest rate to push down
the inflation
We are going to look at very different factors who have an impact on an economy
(are going to try to understand as much as possible of it)
1
, CHAPTER 2: NATIONAL INCOME ACCOUNTING AND THE BALANCE OF PAYMENTS
National Income Accounts (GNP)
national income = income earned by a nation’s factors of production
(there is a difference between GNP and GDP, but we are using both terms for the same thing)
-> we will look at the national income identity
logic behind it
producers earn income from buyers who spend money on goods and services
with other words
amount of expenditure by buyers = amount income for sellers = the value of production
We are going to decompose the GNP in 4 different components
(each component will be discussed in detail)
Y = C + I + G + CA
C: expenditure by domestic consumers
I: expenditure by firms on buildings and equipment
G: expenditure by governments on goods and services
CA: net expenditure by foreigners on domestic goods and services
! Important to know !
the national income identity is not fully correct
-> don’t take in account other possible disturbing factors
ex. Depreciations, transfers (gifts), some taxes…
Why are these components useful?
1. Can compose the relative size of the components for a country
(often we see that consumption is the biggest part)
2. Can use it to compare counties with each other
! keep in mind !
when analysing a figure, you need to make sure that you understand what is represented
Germany
growth mainly because of high rate of
exports
highly dependent on what is happening in
the economy!
France
main motor of growth is consumption
Best option?
in general, there is no better option
-> the best option is to have a balanced amount of each component
2
,Real life examples
Example 1: China (2007, 2009, 2013)
China has grown very fast (almost impossible to stay at that level of growth)
-> grow in GDP driven my investments mainly
-> since 2005 also export driven growth
-> very few consumption by households = unbalance
(lowest share of consumption in any significant economy ever)
lesson to learn
high exports, like Germany, Is not always a positive thing
it is dependent on the economic situation and time
Example 2: United States (2007-2009)
The American economy made a pivot after the financial crisis (crise
financière de 2008)
before the crisis
people felt rich and consumed a lot (saving close to 0%)
after the crisis
people began to consume less and save more (went up to almost 10%)
Example 3: Spain (2022)
GDP of Spain went up, even though consumption and investments has dropped
-> rise in GDP because of rise in net exports
reason
imports fell because of high inflation
(consumers could not afford to buy products from abroad anymore)
! the economy of Spain grew, but NOT in a good way !
Example 4: Russia (2014)
Russian’s GDP grew, even though there is a war
How is it possible?
military Keynesianism: government tries to improve the economy by raising military spendings
(G goes up)
Short summary
Y = C + I + G + CA -> we are going to rewrite the national identity and try to understand It more
domestic residents deeply
foreign residents
3
, National Income Accounting for an Open Economy
basic rule: NI = GNP
National income identity for closed economy
Y=C+I+G
National income identity for open economy
Y = C + I + G + (EX – IM)
Y = sales to domestic residents + sales to foreign residents
Y = C + I + G + CA
More about the Current Account
For the first time, we will rewrite the NI identity
-> are going to isolate CA
CA = Y – (C + I + G)
= national income – spending of residents
What can we say about the current account?
CA < 0 => current account deficit
more imports than exports (buy more from foreigners than you sell to them)
with other words
people are spending more than the income that they have, because uses more output than it
can produce
HOW?
-> can borrow money from the rest of the world (buitenlandse schuldenlast neemt toe)
-> can use your own savings if you have some
CA > 0 => current account surplus
spendings < income
are going to lend money to countries with a CA deficit
The current account is a measure for wealth
= the sum of all CA’s surplus/deficit in the history
! not only over a certain period of time !
𝛥foreign wealth = value of the assets that the country owns abroad
– value of domestic assets owned by foreigners
Examples
Example 1: America
The US is the world's biggest debtor
In the begin of the 80’s, US was a net creditor
BUT there surplus went down and US became a net debtor
expenses > income
-> the economy leans on borrowed money
4
