INTERNATIONAL ECONOMICS AND
ECONOMIC ORGANIZATIONS
INTRODUCTION
INTERNATIONAL ECONOMICS: A ‘GLOBAL PUBLIC GOODS APPROACH
o Basic characteristics of a (pure) public good (ex. clean air, security):
Public goods are the opposite of private goods; those are produced by the market
mechanism (works on supply and demands). Most goods are produced by the mechanism
because they are excludable and rivalrous.
Excludable: if you don’t pay the market price, you can be excluded from using
that good.
Rivalrous: if used it’s no longer available for others to use.
Non-exclusion: you can’t exclude them from using even if they are not willing to pay
the market mechanism is not working here.
Non-rivalry in consumption: even if you consume the product, others can still use the
product.
o In practice: a lot of quasi-public goods, or ‘joint products’; has one of the two characteristics.
o Basic problem: under provision due to free riding
To overcome under provision by ‘rules’, institutions’: public intervention helps to provide
the production ex. taxes.
APPLICATION TO GLOBAL CONTEXT
Global public goods (GPGs): global because some goods are international like air. Some goods are
global by nature, others became global because of globalization like trade, free movement of people,
financial stability.
o Different technologies of provision exist: the way that individual contributions transfer into the
global level of supply of that good
Summation: the sum of all global contributions
Weakest link: different levels of contribution are all effected by the weakest link no
matter their efforts.
Best shot: the highest contributor ex. finding a vaccine.
APPLICATION TO INTERNATIONAL ECONOMICS
o Crisis will begin where the rules and intervention are the lowest and then cause a spill over ex.
USA = becomes the weakest link
o Rules on trade
o International financial stability, optimal capital provision
APPLICATIONS ON INSTITUTIONS:
o International trade issues: the WTO
o International Finance: IMF (mandate: prevent a global financial crisis by monitoring international
capital flows)/World Bank
THE CONCEPT OF THE BALANCE OF PAYMENTS
o Balance of Payments (BoP): an accounting record (in monetary terms) of all transactions of
goods, services, income and financial assets between domestic households, businesses and
government of a given country and residents of the rest of the world during a specific period
(usually 1 year)
All transactions that are across borders (between countries)
, o BoP ‘identity’: current account + capital (and financial) account =0
(IM)BALANCES
o Conceptually, a BoP must always balance (sum to zero); a total BoP surplus or deficit cannot
exist!
Because of system of double entry-booking: one entry indicating the ‘nature’ of the
transaction, another one indicating the foreign exchange consequence (forex inflow or
outflow)
o General rule:
Everything leading to forex inflows is +, so forex inflow itself is –: - is good because it
means goods are coming in.
Everything leading to forex outflows is -, so forex outflow itself is +: + is bad your
holdings of dollars are reduced.
Credit (+): exports, income and current transfers received, decrease of foreign assets,
increase of foreign liabilities.
Debit (-): imports, income and current transfers paid, increase of foreign assets, decrease
of foreign liabilities.
o BUT each of the different BoP components individually can be unbalanced (surpluses/deficits)
o In reality, of course, errors are made: balancing item ‘errors and omissions added to BoP.
TABLE
1. Trade balance deficit
2. People living in one country but employed in
another country. Return you get on a foreign
investment, if you loan on someone, they also
have to pay interests.
3. Receiving more than going out
4. Deficit
5. /
6. /
7. Surplus
8. = foreign direct investment. Is done by private
firms, they buy shares or buy an existing firm or a
new firm where they are shareholders from, they
can own the firm.
9. Two types: equity/ shares or loans (bonds). A
bond will be loaned on a secondary market; you
can buy it today at a particular price and sell it any day. Just because it’s interesting not to steer
in the firm.
10. Just a loan, second type is a deposit. Money comes in, if you pay the money goes out. Putting
money in a foreign account because interest rates can be better than in your own country.
11. Money coming in from export. Increase of foreign exchange
12. /
8,9,10 are cross border investments
PROBLEM WITH FOREIGN INVESTMENT
If you convert your money back to the other currency, it becomes less valuable (you can use the money
there but if you are making money and want it back to your currency it loses value)
PROBLEM OF DEVELOPING COUNTRIES
Lack of domestic resources / saves, they want to invest but don’t have money. So, they look for
foreigners.
,LUCAS PARADOX
The economic observation that capital does not flow from rich to poor countries, despite the theoretical
expectation that poor countries with lower levels of capital per worker should offer higher returns. This
contrasts with the neoclassical theory of capital flows.
CORE OF THE PARADOX
o Theory: According to neoclassical economic theory, capital should flow to countries where it is
scarcer and therefore yields higher returns.
o Observation: In reality, surprisingly little capital flows from capital-rich (developed) countries to
capital-poor (developing) countries.
POSSIBLE EXPLANATIONS
o The explanations for the paradox can be divided into two groups:
Differences in economic fundamentals:
Technology: Differences in technological levels between countries.
Factors of production: Lack of factors of production in poor countries.
Policies and institutions: Poor government policies, corruption, and a weak institutional
structure that discourage investment.
o Capital market imperfections:
Risk: A higher level of risk, such as the risk of political instability or nationalization
(sovereign risk).
Asymmetric information: A difference in available information between investors in
wealthy countries and those in developing countries.
ECONOMIC PERSPECTIVE ON BOP
Concept of the overall (or global) balance: (all items except n.11)
Current account + capital account + financial account balance (excluding changes in reserve assets,
line 11) + net errors and omissions.
Overall balance (above-the-line): + 70 increase in foreign exchange, deficit will lead to less
reserves.
Change in reserve assets, line 11 (including exceptional financing)
Financing (below-the-line): - 70
WHEN DO YOU HAVE A BOP PROBLEM?
o Not necessarily when you have a (major) trade or current account deficit …
o More appropriately: when you have a (structural) overall/global deficit, indicating a loss of
foreign exchange reserves (over the period)
Our example: current account deficit (-250) overcompensated by net financial account
inflows leading to global surplus (+70), and reserve build-up (-70): no problem.
o Without substantial foreign exchange reserve holdings to cover the gap
, CAPITAL ACCOUNT OPENNESS, CAPITAL FLOWS, AND THE LINK WITH GROWTH AND
CRISIS
DEFINING AND MEASURING ‘CAPITAL ACCOUNT’ OPENNESS
o Concepts:
De jure: policy: absence of restrictions (controls, taxes). Allowed or not, what is possible
and what is not.
De facto: practice: actual cross-border transactions. Actual transactions, if allowed, do
not necessarily happen
o Measuring:
De jure indicators: AREAERS report (IMF) (gives details about what is allowed and what
not per country) and Chinn-Ito measure (KAOPEN)
De facto indicators: foreign ‘assets’ and ‘liabilities’
Liabilities relate to ‘inflows’ (creates a foreign liability, because you have to pay
the loan); assets to ‘outflows’ (creates a financial asset, because you are the
creditor)
Liabilities include FDI, portfolio investment, loans (debt) and deposits; assets
include all the former plus foreign exchange reserves.
Based on flows:(financial account of) Balance of Payments
Based on stocks: EWN database
Measures can be ‘gross’ (is looking at assets and liabilities, adding the two take all
the inflows and out flows) or ‘net’ (the difference between the two, what is bigger
than the other one. inflows are bigger or smaller than outflows)
Rich countries will be asset holders, developing countries will be liabilities holders,
they hardly have resources.
GLOBAL CAPITAL FLOWS
o Increased ‘de jure’ openness does not necessarily lead to increased ‘de facto’ inflows (and the
reverse): different pattern in advanced, versus emerging versus other (lower income)
developing countries.
o Global stocks of foreign assets and liabilities increase rapidly, especially in the years up to the
GlobFinCrisis (GFC), drop and then rebound at slower increase rate.
This is also reflected in the evolution of flows, pace of flow increased up to the GFC, lower
after.
o Worldwide ‘allocation’ of capital: from where to where?
Global flows are still largely between ‘advanced economies’; peak in the years up to the
GFC; after those emerging economies gaining, but lower income countries (e.g. Sub-
Saharan Africa) still left out.
Concept of ’Lucas paradox’: you would assume that global capital would flow (more) from
the ‘North’ to the ‘South’, i.e. from to countries with relative capital abundance (hence
lower expected returns) to countries with relative capital scarcity (reflected in higher
expected returns): this is not observed. Clear especially before GFC, still clear with
respect to lower-income countries in more recent years.
ECONOMIC ORGANIZATIONS
INTRODUCTION
INTERNATIONAL ECONOMICS: A ‘GLOBAL PUBLIC GOODS APPROACH
o Basic characteristics of a (pure) public good (ex. clean air, security):
Public goods are the opposite of private goods; those are produced by the market
mechanism (works on supply and demands). Most goods are produced by the mechanism
because they are excludable and rivalrous.
Excludable: if you don’t pay the market price, you can be excluded from using
that good.
Rivalrous: if used it’s no longer available for others to use.
Non-exclusion: you can’t exclude them from using even if they are not willing to pay
the market mechanism is not working here.
Non-rivalry in consumption: even if you consume the product, others can still use the
product.
o In practice: a lot of quasi-public goods, or ‘joint products’; has one of the two characteristics.
o Basic problem: under provision due to free riding
To overcome under provision by ‘rules’, institutions’: public intervention helps to provide
the production ex. taxes.
APPLICATION TO GLOBAL CONTEXT
Global public goods (GPGs): global because some goods are international like air. Some goods are
global by nature, others became global because of globalization like trade, free movement of people,
financial stability.
o Different technologies of provision exist: the way that individual contributions transfer into the
global level of supply of that good
Summation: the sum of all global contributions
Weakest link: different levels of contribution are all effected by the weakest link no
matter their efforts.
Best shot: the highest contributor ex. finding a vaccine.
APPLICATION TO INTERNATIONAL ECONOMICS
o Crisis will begin where the rules and intervention are the lowest and then cause a spill over ex.
USA = becomes the weakest link
o Rules on trade
o International financial stability, optimal capital provision
APPLICATIONS ON INSTITUTIONS:
o International trade issues: the WTO
o International Finance: IMF (mandate: prevent a global financial crisis by monitoring international
capital flows)/World Bank
THE CONCEPT OF THE BALANCE OF PAYMENTS
o Balance of Payments (BoP): an accounting record (in monetary terms) of all transactions of
goods, services, income and financial assets between domestic households, businesses and
government of a given country and residents of the rest of the world during a specific period
(usually 1 year)
All transactions that are across borders (between countries)
, o BoP ‘identity’: current account + capital (and financial) account =0
(IM)BALANCES
o Conceptually, a BoP must always balance (sum to zero); a total BoP surplus or deficit cannot
exist!
Because of system of double entry-booking: one entry indicating the ‘nature’ of the
transaction, another one indicating the foreign exchange consequence (forex inflow or
outflow)
o General rule:
Everything leading to forex inflows is +, so forex inflow itself is –: - is good because it
means goods are coming in.
Everything leading to forex outflows is -, so forex outflow itself is +: + is bad your
holdings of dollars are reduced.
Credit (+): exports, income and current transfers received, decrease of foreign assets,
increase of foreign liabilities.
Debit (-): imports, income and current transfers paid, increase of foreign assets, decrease
of foreign liabilities.
o BUT each of the different BoP components individually can be unbalanced (surpluses/deficits)
o In reality, of course, errors are made: balancing item ‘errors and omissions added to BoP.
TABLE
1. Trade balance deficit
2. People living in one country but employed in
another country. Return you get on a foreign
investment, if you loan on someone, they also
have to pay interests.
3. Receiving more than going out
4. Deficit
5. /
6. /
7. Surplus
8. = foreign direct investment. Is done by private
firms, they buy shares or buy an existing firm or a
new firm where they are shareholders from, they
can own the firm.
9. Two types: equity/ shares or loans (bonds). A
bond will be loaned on a secondary market; you
can buy it today at a particular price and sell it any day. Just because it’s interesting not to steer
in the firm.
10. Just a loan, second type is a deposit. Money comes in, if you pay the money goes out. Putting
money in a foreign account because interest rates can be better than in your own country.
11. Money coming in from export. Increase of foreign exchange
12. /
8,9,10 are cross border investments
PROBLEM WITH FOREIGN INVESTMENT
If you convert your money back to the other currency, it becomes less valuable (you can use the money
there but if you are making money and want it back to your currency it loses value)
PROBLEM OF DEVELOPING COUNTRIES
Lack of domestic resources / saves, they want to invest but don’t have money. So, they look for
foreigners.
,LUCAS PARADOX
The economic observation that capital does not flow from rich to poor countries, despite the theoretical
expectation that poor countries with lower levels of capital per worker should offer higher returns. This
contrasts with the neoclassical theory of capital flows.
CORE OF THE PARADOX
o Theory: According to neoclassical economic theory, capital should flow to countries where it is
scarcer and therefore yields higher returns.
o Observation: In reality, surprisingly little capital flows from capital-rich (developed) countries to
capital-poor (developing) countries.
POSSIBLE EXPLANATIONS
o The explanations for the paradox can be divided into two groups:
Differences in economic fundamentals:
Technology: Differences in technological levels between countries.
Factors of production: Lack of factors of production in poor countries.
Policies and institutions: Poor government policies, corruption, and a weak institutional
structure that discourage investment.
o Capital market imperfections:
Risk: A higher level of risk, such as the risk of political instability or nationalization
(sovereign risk).
Asymmetric information: A difference in available information between investors in
wealthy countries and those in developing countries.
ECONOMIC PERSPECTIVE ON BOP
Concept of the overall (or global) balance: (all items except n.11)
Current account + capital account + financial account balance (excluding changes in reserve assets,
line 11) + net errors and omissions.
Overall balance (above-the-line): + 70 increase in foreign exchange, deficit will lead to less
reserves.
Change in reserve assets, line 11 (including exceptional financing)
Financing (below-the-line): - 70
WHEN DO YOU HAVE A BOP PROBLEM?
o Not necessarily when you have a (major) trade or current account deficit …
o More appropriately: when you have a (structural) overall/global deficit, indicating a loss of
foreign exchange reserves (over the period)
Our example: current account deficit (-250) overcompensated by net financial account
inflows leading to global surplus (+70), and reserve build-up (-70): no problem.
o Without substantial foreign exchange reserve holdings to cover the gap
, CAPITAL ACCOUNT OPENNESS, CAPITAL FLOWS, AND THE LINK WITH GROWTH AND
CRISIS
DEFINING AND MEASURING ‘CAPITAL ACCOUNT’ OPENNESS
o Concepts:
De jure: policy: absence of restrictions (controls, taxes). Allowed or not, what is possible
and what is not.
De facto: practice: actual cross-border transactions. Actual transactions, if allowed, do
not necessarily happen
o Measuring:
De jure indicators: AREAERS report (IMF) (gives details about what is allowed and what
not per country) and Chinn-Ito measure (KAOPEN)
De facto indicators: foreign ‘assets’ and ‘liabilities’
Liabilities relate to ‘inflows’ (creates a foreign liability, because you have to pay
the loan); assets to ‘outflows’ (creates a financial asset, because you are the
creditor)
Liabilities include FDI, portfolio investment, loans (debt) and deposits; assets
include all the former plus foreign exchange reserves.
Based on flows:(financial account of) Balance of Payments
Based on stocks: EWN database
Measures can be ‘gross’ (is looking at assets and liabilities, adding the two take all
the inflows and out flows) or ‘net’ (the difference between the two, what is bigger
than the other one. inflows are bigger or smaller than outflows)
Rich countries will be asset holders, developing countries will be liabilities holders,
they hardly have resources.
GLOBAL CAPITAL FLOWS
o Increased ‘de jure’ openness does not necessarily lead to increased ‘de facto’ inflows (and the
reverse): different pattern in advanced, versus emerging versus other (lower income)
developing countries.
o Global stocks of foreign assets and liabilities increase rapidly, especially in the years up to the
GlobFinCrisis (GFC), drop and then rebound at slower increase rate.
This is also reflected in the evolution of flows, pace of flow increased up to the GFC, lower
after.
o Worldwide ‘allocation’ of capital: from where to where?
Global flows are still largely between ‘advanced economies’; peak in the years up to the
GFC; after those emerging economies gaining, but lower income countries (e.g. Sub-
Saharan Africa) still left out.
Concept of ’Lucas paradox’: you would assume that global capital would flow (more) from
the ‘North’ to the ‘South’, i.e. from to countries with relative capital abundance (hence
lower expected returns) to countries with relative capital scarcity (reflected in higher
expected returns): this is not observed. Clear especially before GFC, still clear with
respect to lower-income countries in more recent years.
