INTERNATIONAL MONETARY ECONOMICS (2026)
CHAPTER 1: Introduction
Globalisation
The United States (US) exports (EX) and
imports (IM) as charges of gross
domestic product have been on an
upward trend. The international trade
has roughly tripled in importance
compared to the economy as a whole in
the past 60 years. Note that in the US,
the imports have always been higher
than the exports. During recessions we
see that both IM and EX substantially
fell, for example in 2009 and later also
during the COVID-19 pandemic in 2020.
International trade is even more important to most countries than it is to the US. Belgium for
instance is a perfect example of a country who is highly dependent on import from all over the
world, compared to bigger economies like Germany.
Trump played around a lot with tariffs on international trade since he became president of the US,
which has had a big influence on the trade balance. China has always had a trade surplus because
it exports a lot. For the US it is the other way around, they have a trade deficit. Since Trump began
his second term as president, the dollar has fallen significantly and the euro has been going
stronger.
CHAPTER 2: National income accounting and the balance of payments
Preview
International macroeconomics are study how the interactions of national economies influence
the worldwide pattern of industrial activity. To be able to form a picture of these interactions, we
use statistical data. The two related tools that will be used are national income accounting and
balance of payment (BOP) accounting.
National income accounts
The national income accounts record the value of national income (NI) that results from
production and expenditure. National income is often defined to be the income earned by a
nation’s factors of production.
1
,What we will analyse is the national income identity. Producers earn income from buyers who
spend money on goods and services.
𝐄𝐱𝐩𝐞𝐧𝐝𝐢𝐭𝐮𝐫𝐞 𝐛𝐲 𝐛𝐮𝐲𝐞𝐫𝐬 = 𝐢𝐧𝐜𝐨𝐦𝐞 𝐟𝐨𝐫 𝐬𝐞𝐥𝐥𝐞𝐫𝐬 = 𝐯𝐚𝐥𝐮𝐞 𝐨𝐟 𝐩𝐫𝐨𝐝𝐮𝐜𝐭𝐢𝐨𝐧
Every single euro spent by an economic agent ends up in the pockets of somebody else and
constitutes part of the income of that economic agent. This is why expenditure equals income.
National income accounts: GNP
The gross national product (GNP) is calculated by adding the value of expenditure on final goods
and services produced. Intermediate and second-hand goods do not make part of this.
- Consumption: expenditure by domestic consumers.
- Investment: expenditure by firms on buildings and equipment.
- Government purchases: expenditure by governments on goods and services.
- Current account (CA) balance (EX – IM): net expenditure by foreigners on domestic goods
and services.
The national income accounts can be thought of
as classifying each transaction that contributes
to national income according to the type of
expenditure that gives rise to it.
The US gross national product for example can
be broken down into different components. It is
useful to divide the GNP because it is easy to
analyse each components over time and
compare the different components to other
countries. We can see in the graph that the US
imports more than they export, because their CA
is negative.
Capital depreciation and international transfers
The national income must equal the national product, which can only be correct if the GNP is
adjusted. Firstly, the GNP does not take into account the depreciation of machinery and
structures, which would reduce the income of capital owners. We must therefore subtract from
GNP the depreciation of capital over the period. Secondly, a country’s income may include
unilateral transfers, which contain things like unrequited gifts from residents of foreign countries,
as well as taxes paid to or subsidies received from foreign governments. An example of this are
pension payments to retired citizens living abroad or foreign aid such as relief funds donated. For
this course this is less important, but you should be aware of it.
𝐍𝐈 = 𝐆𝐍𝐏 − 𝐝𝐞𝐩𝐫𝐞𝐜𝐢𝐚𝐭𝐢𝐨𝐧 − 𝐧𝐞𝐭 𝐭𝐫𝐚𝐧𝐬𝐟𝐞𝐫𝐬 − 𝐢𝐧𝐝𝐢𝐫𝐞𝐜𝐭 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬 𝐭𝐚𝐱𝐞𝐬
2
,Difference between GNP and GDP
The GNP is the value of all final goods and services produced by a country’s factors of production,
while GDP is the volume of production within a country’s borders. The difference between the two
are the net receipts of factor income. The GNP is based on the nationality of the factors, while the
GDP is based on the location of the factors. Eventually this difference would come down to:
𝐆𝐍𝐏 = 𝐆𝐃𝐏 − 𝐝𝐨𝐦𝐞𝐬𝐭𝐢𝐜 𝐢𝐧𝐜. 𝐞𝐚𝐫𝐧𝐞𝐝 𝐛𝐲 𝐟𝐨𝐫𝐞𝐢𝐠𝐧𝐞𝐫𝐬 + 𝐟𝐨𝐫𝐞𝐢𝐠𝐧 𝐢𝐧𝐜. 𝐞𝐚𝐫𝐧𝐞𝐝 𝐛𝐲 𝐝𝐨𝐦𝐞𝐬𝐭𝐢𝐜 𝐫𝐞𝐬𝐢𝐝𝐞𝐧𝐭𝐬
Breaking down GDP
This example shows the different components of GDP
growth between France and Germany. At the time, Germany
was not doing too well and France was doing great. Without
the different components we would never be able to see
that one of them was doing much better than the other. The
growth of Germany is entirely based of the fact that there is
a lot of foreign demand and thus export, while the growth of
France comes from consumer and government spending.
Investments are even negative in the case of Germany. This
comparison shows that is very important to look at the
different parts of growth, because they can get you a clear
picture of what is actually going on. Looking at the total
number only, can give you a false positive picture.
Another example from a
couple years later shows
that consumption has only
grown relatively modestly,
and investment scarcely at
all, in Germany and the rest
of the core. Instead, core and periphery alike have relied on international demand for their exports.
The euro area’s trade surplus rose from just 0.1% of GDP to 3.7%. Europe’s addiction to many
exports leaves it vulnerable to any deceleration in global growth. Were China’s economy to slow
more sharply, or the US to return to recession, Europe would see growth wane. Europe is highly
dependent on other economies.
In China we see incredible growth rates. Their economy is not
driven by exports, but by investment which accounts for over
40% of GDP. Although, since 2005 net exports have contributed
more than 20% of their growth. Important to know is that the
contribution of household consumption is way lower in the
West. In short, it is a very unbalanced situation. There is too
much focus on one specific aspect, which is investment in this
case. In the long run, China needs to rebalance its economy by
increasing their consumption. China’s economy has been very
distorted. In 2007, personal consumption was 35% of GDP and
they were investing 11% of GDP in low-yielding foreign assets
3
,via its CA surplus. Instead of making sure something is done about millions of poor people, they
lend money to others. Has the money stayed in China, it could have been put to good use to
improve the life standards for example.
Later on in 2010, Chinese growth still was unbalanced and
highly depended on investment as a source of demand and
driver of supply. We can say that their economy is the most
capitalist economy ever. Over the years, gross investment
rose from 32% to 46% of GDP and household consumption
fell by almost the same amount. This must be the lowest
share of consumption in any significant economy ever.
Private consumption was about 35% of GDP at the time,
which is roughly half of what it was in the US.
Today, there is still a lot of need for export, because they produce too much. The consumption is
still low because social security is not as good as here. The likelihood to safe is much higher, for
whenever they become ill of unemployed.
In the US, growth has been led by consumer spending for
decades. Thanks to rising asset prices and easier access to
credit, Americans went on a seemingly unstoppable
spending binge. Consumer spending and residential
investment (real estate) rose from 67% to 75% of GDP over
25 years, while the household saving rate fell from 10% of
disposable income to almost 0. Now, they safe about 5% of
their income, which is still low. The collapse of consumption
has dramatically changed the composition of America’s
economy. A huge increase in private saving has been offset
by a leap in the budget deficit. The financial crisis has clearly
changed the composition of the US economy, they had no
choice but to start saving more.
Spain is another example, where the GDP inched up 0,2% between two quarters in 2022.
Compared with the fourth quarter a year earlier, output rose 2,7% against a lower forecast. But
Spain was heavily hit by the crisis, how is this possible? The economy grew for the wrong reasons.
The expansion was largely driven by a rise in net exports as imports fell, reflecting the impact on
demand from high inflation and rising borrowing costs. Imports went down because there was no
sufficient money anymore. Household consumption was down, wiping out the previous quarter’s
expansion and investment fell sharply.
𝐘 ↑= 𝐂 ↓ +𝐈 ↓ +𝐆 + (𝐄𝐗 − 𝐈𝐌 ↓↓↓) ↑↑↑
The import going down much more than the consumption and investment, brought with it the false
positive image of a growing economy. This is because when import goes down, the net export goes
up and thus Y goes up as well.
4
,National income accounting for an open economy
In a closed economy, there is no international trade and the only income comes from domestic
factors. For an open economy we get the following equation for the national income identity:
𝐘 = 𝐂 + 𝐈 + 𝐆 + 𝐂𝐀
Where the CA is the same as (EX – IM). Once you’re in an open economy, national income no
longer necessarily need to be generated domestically but can also come from foreigners. Another
way of looking at the identity is as followed:
𝐘 = 𝐞𝐱𝐩𝐞𝐧𝐝𝐢𝐭𝐮𝐫𝐞 𝐛𝐲 𝐝𝐨𝐦𝐞𝐬𝐭𝐢𝐜 𝐫𝐞𝐬𝐢𝐝𝐞𝐧𝐭𝐬 + 𝐧𝐞𝐭 𝐞𝐱𝐩𝐞𝐧𝐝𝐢𝐭𝐮𝐫𝐞 𝐛𝐲 𝐟𝐨𝐫𝐞𝐢𝐠𝐧 𝐫𝐞𝐬𝐢𝐝𝐞𝐧𝐭𝐬
The CA and foreign indebtedness
The CA is one of the transmission channels for international trade, it is an important concept. A
difference in the CA leads to a difference in national income, which leads to a difference in
unemployment. The CA measures the size and direction of international borrowing. This can be
illustrated by reforming the NI identity to where it becomes:
𝐂𝐀 = 𝐘 − (𝐂 + 𝐈 + 𝐆)
𝐂𝐀 = 𝐧𝐚𝐭𝐢𝐨𝐧𝐚𝐥 𝐢𝐧𝐜𝐨𝐦𝐞 − 𝐬𝐩𝐞𝐧𝐝𝐢𝐧𝐠 𝐨𝐟 𝐫𝐞𝐬𝐢𝐝𝐞𝐧𝐭𝐬
When a country runs a CA deficit, this means that the number is negative and thus de spending of
residents is bigger than the national income. The only way to spend more than you earn, is to
borrow from the rest of the world. The nation buys more from foreigners than it sells to them, they
leave beyond their means. They borrow abroad to finance the CA deficit, so foreign indebtedness
increases. The CA measures the financial position of a country, it is an indication for foreign
wealth.
The US is the world’s biggest debtor
The US used to own more foreign assets
than the other way around, but every year
you run a CA deficit your financial wealth
goes down. Now the foreign owned US
assets are much higher than the US
owned foreign assets.
The CA of the US used to be pretty much
balanced, but this changed when the US
started running a CA deficit. First this was
really small, but like already mentioned it
decreases the financial position. The
string of CA deficits started early and small, and by now the country has accumulated a
substantial amount of net foreign debt. The years where it went back up had nothing to do with
the trade balance of the US but was for example Saudi Arabia who financially compensated the
military expenditure for the Gulf war.
5
, In 2004, the US had a CA deficit of 668 billion dollars. In effect, it
had to borrow this amount from the rest of the world. The US’s
external liabilities rose by only 170 billion dollars, which is only a
fraction of the CA deficit amount. Back then the dollars stood
very weak, which had a positive effect because they got more
dollars for foreign assets. What kept the US standing are
exchange rate effects.
Valuation effects
The net foreign wealth of a country is the difference between claims that country has on the rest
of the world and claims that the rest of the world has on that country. Applied on the US, net
foreign wealth is the difference between foreign assets owned by the US and US assets owned by
foreigners.
𝐔𝐒 𝐧𝐞𝐭 𝐟𝐨𝐫𝐞𝐢𝐠𝐧 𝐰𝐞𝐚𝐥𝐭𝐡 ↑↑ = 𝐔𝐒 𝐨𝐰𝐧𝐞𝐝 𝐟𝐨𝐫𝐞𝐢𝐠𝐧 𝐚𝐬𝐬𝐞𝐭𝐬 ↑↑↑ − 𝐟𝐨𝐫𝐞𝐢𝐠𝐧 𝐨𝐰𝐧𝐞𝐝 𝐔𝐒 𝐚𝐬𝐬𝐞𝐭𝐬 ↑=
Going further on the case of a weak dollar On the other side we look at the foreign
and looking at the American portfolio, this portfolio. This portfolio is mostly expressed
would increase the value of the US owned in dollars, so whenever the exchange rate of
foreign assets expressed in dollars (↑). When the dollar against any other currency
the foreign assets or the value of the foreign fluctuates the value of the foreign portfolio is
assets is converted into dollars, you get more hardly affected and remains constant. It is
dollars for your euros. A weakening of the not affected by exchange rates (=).
dollar will increase the value of the overseas Secondly, low risk assets have to do with the
investments of the US. We also observe that nature of the foreign investors. These are to a
the larger presence of risky assets generate a large extend central banks, who are typically
higher return. A higher risk comes with a not risky at all because they are interested in
higher compensation (↑↑), a higher rate of safe liquid assets (↑). The rate of return is
return. lower.
In times where the stock markets do not perform as well as above, the rate of return on a risky
portfolio will be lower and it could even be negative. In a period when the dollar strengthens, the
valuation effect will go in the opposite direction. A good example of a valuation effect is the UK
when Brexit happened. It was bad for the economy, but good for global investment positions
because of the weak pound.
US trade deficit
Two out of every three containers that arrived in the US left empty,
because the US didn’t have anything to trade in exchange. The imports
were much higher than the exports, which came with a trade
imbalance. Spending was much higher than the actual income and
the financial debt of the US only got bigger and bigger. The US had
racked up 2.69 trillion dollars in net debt to the rest of the world in
2006, a record run of charges on the national credit card. This is no
problem as long as there is enough income to serve big bills. For a
country this means economic growth that is fast enough to generate
6
CHAPTER 1: Introduction
Globalisation
The United States (US) exports (EX) and
imports (IM) as charges of gross
domestic product have been on an
upward trend. The international trade
has roughly tripled in importance
compared to the economy as a whole in
the past 60 years. Note that in the US,
the imports have always been higher
than the exports. During recessions we
see that both IM and EX substantially
fell, for example in 2009 and later also
during the COVID-19 pandemic in 2020.
International trade is even more important to most countries than it is to the US. Belgium for
instance is a perfect example of a country who is highly dependent on import from all over the
world, compared to bigger economies like Germany.
Trump played around a lot with tariffs on international trade since he became president of the US,
which has had a big influence on the trade balance. China has always had a trade surplus because
it exports a lot. For the US it is the other way around, they have a trade deficit. Since Trump began
his second term as president, the dollar has fallen significantly and the euro has been going
stronger.
CHAPTER 2: National income accounting and the balance of payments
Preview
International macroeconomics are study how the interactions of national economies influence
the worldwide pattern of industrial activity. To be able to form a picture of these interactions, we
use statistical data. The two related tools that will be used are national income accounting and
balance of payment (BOP) accounting.
National income accounts
The national income accounts record the value of national income (NI) that results from
production and expenditure. National income is often defined to be the income earned by a
nation’s factors of production.
1
,What we will analyse is the national income identity. Producers earn income from buyers who
spend money on goods and services.
𝐄𝐱𝐩𝐞𝐧𝐝𝐢𝐭𝐮𝐫𝐞 𝐛𝐲 𝐛𝐮𝐲𝐞𝐫𝐬 = 𝐢𝐧𝐜𝐨𝐦𝐞 𝐟𝐨𝐫 𝐬𝐞𝐥𝐥𝐞𝐫𝐬 = 𝐯𝐚𝐥𝐮𝐞 𝐨𝐟 𝐩𝐫𝐨𝐝𝐮𝐜𝐭𝐢𝐨𝐧
Every single euro spent by an economic agent ends up in the pockets of somebody else and
constitutes part of the income of that economic agent. This is why expenditure equals income.
National income accounts: GNP
The gross national product (GNP) is calculated by adding the value of expenditure on final goods
and services produced. Intermediate and second-hand goods do not make part of this.
- Consumption: expenditure by domestic consumers.
- Investment: expenditure by firms on buildings and equipment.
- Government purchases: expenditure by governments on goods and services.
- Current account (CA) balance (EX – IM): net expenditure by foreigners on domestic goods
and services.
The national income accounts can be thought of
as classifying each transaction that contributes
to national income according to the type of
expenditure that gives rise to it.
The US gross national product for example can
be broken down into different components. It is
useful to divide the GNP because it is easy to
analyse each components over time and
compare the different components to other
countries. We can see in the graph that the US
imports more than they export, because their CA
is negative.
Capital depreciation and international transfers
The national income must equal the national product, which can only be correct if the GNP is
adjusted. Firstly, the GNP does not take into account the depreciation of machinery and
structures, which would reduce the income of capital owners. We must therefore subtract from
GNP the depreciation of capital over the period. Secondly, a country’s income may include
unilateral transfers, which contain things like unrequited gifts from residents of foreign countries,
as well as taxes paid to or subsidies received from foreign governments. An example of this are
pension payments to retired citizens living abroad or foreign aid such as relief funds donated. For
this course this is less important, but you should be aware of it.
𝐍𝐈 = 𝐆𝐍𝐏 − 𝐝𝐞𝐩𝐫𝐞𝐜𝐢𝐚𝐭𝐢𝐨𝐧 − 𝐧𝐞𝐭 𝐭𝐫𝐚𝐧𝐬𝐟𝐞𝐫𝐬 − 𝐢𝐧𝐝𝐢𝐫𝐞𝐜𝐭 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬 𝐭𝐚𝐱𝐞𝐬
2
,Difference between GNP and GDP
The GNP is the value of all final goods and services produced by a country’s factors of production,
while GDP is the volume of production within a country’s borders. The difference between the two
are the net receipts of factor income. The GNP is based on the nationality of the factors, while the
GDP is based on the location of the factors. Eventually this difference would come down to:
𝐆𝐍𝐏 = 𝐆𝐃𝐏 − 𝐝𝐨𝐦𝐞𝐬𝐭𝐢𝐜 𝐢𝐧𝐜. 𝐞𝐚𝐫𝐧𝐞𝐝 𝐛𝐲 𝐟𝐨𝐫𝐞𝐢𝐠𝐧𝐞𝐫𝐬 + 𝐟𝐨𝐫𝐞𝐢𝐠𝐧 𝐢𝐧𝐜. 𝐞𝐚𝐫𝐧𝐞𝐝 𝐛𝐲 𝐝𝐨𝐦𝐞𝐬𝐭𝐢𝐜 𝐫𝐞𝐬𝐢𝐝𝐞𝐧𝐭𝐬
Breaking down GDP
This example shows the different components of GDP
growth between France and Germany. At the time, Germany
was not doing too well and France was doing great. Without
the different components we would never be able to see
that one of them was doing much better than the other. The
growth of Germany is entirely based of the fact that there is
a lot of foreign demand and thus export, while the growth of
France comes from consumer and government spending.
Investments are even negative in the case of Germany. This
comparison shows that is very important to look at the
different parts of growth, because they can get you a clear
picture of what is actually going on. Looking at the total
number only, can give you a false positive picture.
Another example from a
couple years later shows
that consumption has only
grown relatively modestly,
and investment scarcely at
all, in Germany and the rest
of the core. Instead, core and periphery alike have relied on international demand for their exports.
The euro area’s trade surplus rose from just 0.1% of GDP to 3.7%. Europe’s addiction to many
exports leaves it vulnerable to any deceleration in global growth. Were China’s economy to slow
more sharply, or the US to return to recession, Europe would see growth wane. Europe is highly
dependent on other economies.
In China we see incredible growth rates. Their economy is not
driven by exports, but by investment which accounts for over
40% of GDP. Although, since 2005 net exports have contributed
more than 20% of their growth. Important to know is that the
contribution of household consumption is way lower in the
West. In short, it is a very unbalanced situation. There is too
much focus on one specific aspect, which is investment in this
case. In the long run, China needs to rebalance its economy by
increasing their consumption. China’s economy has been very
distorted. In 2007, personal consumption was 35% of GDP and
they were investing 11% of GDP in low-yielding foreign assets
3
,via its CA surplus. Instead of making sure something is done about millions of poor people, they
lend money to others. Has the money stayed in China, it could have been put to good use to
improve the life standards for example.
Later on in 2010, Chinese growth still was unbalanced and
highly depended on investment as a source of demand and
driver of supply. We can say that their economy is the most
capitalist economy ever. Over the years, gross investment
rose from 32% to 46% of GDP and household consumption
fell by almost the same amount. This must be the lowest
share of consumption in any significant economy ever.
Private consumption was about 35% of GDP at the time,
which is roughly half of what it was in the US.
Today, there is still a lot of need for export, because they produce too much. The consumption is
still low because social security is not as good as here. The likelihood to safe is much higher, for
whenever they become ill of unemployed.
In the US, growth has been led by consumer spending for
decades. Thanks to rising asset prices and easier access to
credit, Americans went on a seemingly unstoppable
spending binge. Consumer spending and residential
investment (real estate) rose from 67% to 75% of GDP over
25 years, while the household saving rate fell from 10% of
disposable income to almost 0. Now, they safe about 5% of
their income, which is still low. The collapse of consumption
has dramatically changed the composition of America’s
economy. A huge increase in private saving has been offset
by a leap in the budget deficit. The financial crisis has clearly
changed the composition of the US economy, they had no
choice but to start saving more.
Spain is another example, where the GDP inched up 0,2% between two quarters in 2022.
Compared with the fourth quarter a year earlier, output rose 2,7% against a lower forecast. But
Spain was heavily hit by the crisis, how is this possible? The economy grew for the wrong reasons.
The expansion was largely driven by a rise in net exports as imports fell, reflecting the impact on
demand from high inflation and rising borrowing costs. Imports went down because there was no
sufficient money anymore. Household consumption was down, wiping out the previous quarter’s
expansion and investment fell sharply.
𝐘 ↑= 𝐂 ↓ +𝐈 ↓ +𝐆 + (𝐄𝐗 − 𝐈𝐌 ↓↓↓) ↑↑↑
The import going down much more than the consumption and investment, brought with it the false
positive image of a growing economy. This is because when import goes down, the net export goes
up and thus Y goes up as well.
4
,National income accounting for an open economy
In a closed economy, there is no international trade and the only income comes from domestic
factors. For an open economy we get the following equation for the national income identity:
𝐘 = 𝐂 + 𝐈 + 𝐆 + 𝐂𝐀
Where the CA is the same as (EX – IM). Once you’re in an open economy, national income no
longer necessarily need to be generated domestically but can also come from foreigners. Another
way of looking at the identity is as followed:
𝐘 = 𝐞𝐱𝐩𝐞𝐧𝐝𝐢𝐭𝐮𝐫𝐞 𝐛𝐲 𝐝𝐨𝐦𝐞𝐬𝐭𝐢𝐜 𝐫𝐞𝐬𝐢𝐝𝐞𝐧𝐭𝐬 + 𝐧𝐞𝐭 𝐞𝐱𝐩𝐞𝐧𝐝𝐢𝐭𝐮𝐫𝐞 𝐛𝐲 𝐟𝐨𝐫𝐞𝐢𝐠𝐧 𝐫𝐞𝐬𝐢𝐝𝐞𝐧𝐭𝐬
The CA and foreign indebtedness
The CA is one of the transmission channels for international trade, it is an important concept. A
difference in the CA leads to a difference in national income, which leads to a difference in
unemployment. The CA measures the size and direction of international borrowing. This can be
illustrated by reforming the NI identity to where it becomes:
𝐂𝐀 = 𝐘 − (𝐂 + 𝐈 + 𝐆)
𝐂𝐀 = 𝐧𝐚𝐭𝐢𝐨𝐧𝐚𝐥 𝐢𝐧𝐜𝐨𝐦𝐞 − 𝐬𝐩𝐞𝐧𝐝𝐢𝐧𝐠 𝐨𝐟 𝐫𝐞𝐬𝐢𝐝𝐞𝐧𝐭𝐬
When a country runs a CA deficit, this means that the number is negative and thus de spending of
residents is bigger than the national income. The only way to spend more than you earn, is to
borrow from the rest of the world. The nation buys more from foreigners than it sells to them, they
leave beyond their means. They borrow abroad to finance the CA deficit, so foreign indebtedness
increases. The CA measures the financial position of a country, it is an indication for foreign
wealth.
The US is the world’s biggest debtor
The US used to own more foreign assets
than the other way around, but every year
you run a CA deficit your financial wealth
goes down. Now the foreign owned US
assets are much higher than the US
owned foreign assets.
The CA of the US used to be pretty much
balanced, but this changed when the US
started running a CA deficit. First this was
really small, but like already mentioned it
decreases the financial position. The
string of CA deficits started early and small, and by now the country has accumulated a
substantial amount of net foreign debt. The years where it went back up had nothing to do with
the trade balance of the US but was for example Saudi Arabia who financially compensated the
military expenditure for the Gulf war.
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, In 2004, the US had a CA deficit of 668 billion dollars. In effect, it
had to borrow this amount from the rest of the world. The US’s
external liabilities rose by only 170 billion dollars, which is only a
fraction of the CA deficit amount. Back then the dollars stood
very weak, which had a positive effect because they got more
dollars for foreign assets. What kept the US standing are
exchange rate effects.
Valuation effects
The net foreign wealth of a country is the difference between claims that country has on the rest
of the world and claims that the rest of the world has on that country. Applied on the US, net
foreign wealth is the difference between foreign assets owned by the US and US assets owned by
foreigners.
𝐔𝐒 𝐧𝐞𝐭 𝐟𝐨𝐫𝐞𝐢𝐠𝐧 𝐰𝐞𝐚𝐥𝐭𝐡 ↑↑ = 𝐔𝐒 𝐨𝐰𝐧𝐞𝐝 𝐟𝐨𝐫𝐞𝐢𝐠𝐧 𝐚𝐬𝐬𝐞𝐭𝐬 ↑↑↑ − 𝐟𝐨𝐫𝐞𝐢𝐠𝐧 𝐨𝐰𝐧𝐞𝐝 𝐔𝐒 𝐚𝐬𝐬𝐞𝐭𝐬 ↑=
Going further on the case of a weak dollar On the other side we look at the foreign
and looking at the American portfolio, this portfolio. This portfolio is mostly expressed
would increase the value of the US owned in dollars, so whenever the exchange rate of
foreign assets expressed in dollars (↑). When the dollar against any other currency
the foreign assets or the value of the foreign fluctuates the value of the foreign portfolio is
assets is converted into dollars, you get more hardly affected and remains constant. It is
dollars for your euros. A weakening of the not affected by exchange rates (=).
dollar will increase the value of the overseas Secondly, low risk assets have to do with the
investments of the US. We also observe that nature of the foreign investors. These are to a
the larger presence of risky assets generate a large extend central banks, who are typically
higher return. A higher risk comes with a not risky at all because they are interested in
higher compensation (↑↑), a higher rate of safe liquid assets (↑). The rate of return is
return. lower.
In times where the stock markets do not perform as well as above, the rate of return on a risky
portfolio will be lower and it could even be negative. In a period when the dollar strengthens, the
valuation effect will go in the opposite direction. A good example of a valuation effect is the UK
when Brexit happened. It was bad for the economy, but good for global investment positions
because of the weak pound.
US trade deficit
Two out of every three containers that arrived in the US left empty,
because the US didn’t have anything to trade in exchange. The imports
were much higher than the exports, which came with a trade
imbalance. Spending was much higher than the actual income and
the financial debt of the US only got bigger and bigger. The US had
racked up 2.69 trillion dollars in net debt to the rest of the world in
2006, a record run of charges on the national credit card. This is no
problem as long as there is enough income to serve big bills. For a
country this means economic growth that is fast enough to generate
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