TERMINOLOGY ECONOMICS
INTRODUCTORY SESSION: GLOBAL PUBLIC GOODS & THE BALANCE
OF PAYMENTS
PUBLIC GOODS: goods that are (i) non-exclusionary and (ii) non-rivalrous meaning
that (i) when they are produced you cannot exclude people from benefiting from the
good even if they do not pay and (ii) even if you consume the good, others can still
consume it as well – my consumption does not influence the ability of others to
consume the good -> because very little goods actually have these two
characteristics, a broader/ more general definition of public goods is also sometimes
used: public goods are all goods and services that we want to have that cannot be
produced by the market mechanism because if you would leave it up to the market
mechanism they will not be produced or underproduced (= underprovision because
of free-riding)
QUASI-PUBLIC GOODS: goods that are either non-exclusionary or non-rivalrous (i.e.
have one of the two characteristics of public goods)
GLOBAL PUBLIC GOODS: public goods that are global (in the sense that they do not
know borders) and face the same underprovision problem if their production is left up
to the market mechanism and therefore also require/ desire public interventions also
at the international level. These public goods can be global by nature or as a result of
globalization
TECHNOLOGIES OF PROVISION: the way in which individual contribution by states
or people are transferred into the global level of supply of that good (> how
individual contributions relate to the global provision)
Summation: the global supply is the sum of the individual contributions (ex.
individual initiatives to reduce pollution will help the global reduction) – idea
that everyone matters
Weakest link: irrespective of the individual efforts, the global level of
protection will be determined by the contribution of the weakest link, eg.
international financial stability
Best shot: the collective level of protection/ provision is determined solely by
the level of intervention of the one with the highest contribution
INTERNATIONAL FINANCIAL STABILITY: a global public good that requires public
intervention > when there is a liberalisation of cross-border investments, national
financial systems become intertwined and connected and as a result, a financial
crisis in country x can spill over in other countries and cause a global financial crisis
> mandate of IMF: to prevent a global financial crisis and ensure international
financial stability
OPTIMAL CAPITAL PROVISION: a global public good that requires public
intervention to ensure that funds worldwide are directed to places where they are
most needed > mandate of WB
MARKET FAILURE: a situation where the free market does not allocate resources
efficiently, leading to a loss of economic and social welfare.
BALANCE OF PAYMENTS: an accounting record that show for a specific country all
its (incoming and outcoming) cross-border/ international transactions with the rest of
1
, the world within a certain period (typically 1 year). The BoP consists of three main
parts: the current account + capital account + financial account -> the sum of these
parts should always be 0 meaning the the BoP is balanced!
Why? Because of double entry-booking: every single cross-border
transaction gives rise to both a debit and a credit entry with same number but
different sign (-)/(+) > one entry indicating the ‘nature’ of the transaction,
other one indicating the foreign exchange consequence (forex inflow or
outflow)
CAPITAL ACOUNT OPENNESS: the extent to which as a country you accept these
cross-border transactions/ investments etc. = country-policy decision to put yourself
open to receive those kind of transactions and allow your residents to do the same
abroad
FOREIGN EXCHANGE (FOREX): a currency that is used/ accepted in trade
worldwide (i.e. has international purchasing power) > this is a limited set of
currencies like the US dollar, the Euro, British pound, the Yen
Forex stock: total amount of of forex assets at a given moment
Forex flow: forex inflow and outflows > that leads to a change (increase/
decrease) in stock of forex reserves -> the BoP looks at the flows (all
transaction over a period)
INTERNATIONAL FINANCE (1): THE CASE FOR FREE CAPITAL
MOBILITY
CAPITAL ACCOUNT OPENNESS (sometimes also called financial globalization or
financial integration): the extent to which a country is allowing transborder financial
transactions (FDI, portfolio investments, other investments) -> this can be look at
from two perspectives:
De jure perspective: looks at policies and policy-decisions of the country >
what restrictions/ controls/ taxes/ ...are there? -> this can be ‘measured’ by
looking at reports (IMF reports are generally used for this)
De facto perspective: looks at actual transactions that can be observed ->
this can be ‘measured’ by looking at foreign assets and liabilities -> this can
be looked at from a flow perspective (what has come in and gone out during a
particular period) or from a stock perspective (what is the total amount we
have today, the accumulation of all the flows up until today, also by looking at
the EWN (IMF database))
FOREIGN ASSETS: what a country (or company/individual) owns abroad (e.g.,
foreign stocks, bonds, real estate) > outflows
FOREIGN LIABILITIES: what a country owes to foreigners (e.g., foreign-held
government debt, foreign direct investment in domestic firms) > inflows
The difference in foreign assets and foreign liabilities is the Net Foreign
Assets (NFA), this shows if a nation is a net lender/ net asset holder (positive
NFA) or net borrower/ net liability holder (negative NFA)
LUCAS PARADOX: you would assume that global capital would flow (more) from the
‘North’/ advanced economies to the ‘South’/ developing economies, i.e. from to
countries with relative capital abundance (hence lower expected returns) to countries
2
INTRODUCTORY SESSION: GLOBAL PUBLIC GOODS & THE BALANCE
OF PAYMENTS
PUBLIC GOODS: goods that are (i) non-exclusionary and (ii) non-rivalrous meaning
that (i) when they are produced you cannot exclude people from benefiting from the
good even if they do not pay and (ii) even if you consume the good, others can still
consume it as well – my consumption does not influence the ability of others to
consume the good -> because very little goods actually have these two
characteristics, a broader/ more general definition of public goods is also sometimes
used: public goods are all goods and services that we want to have that cannot be
produced by the market mechanism because if you would leave it up to the market
mechanism they will not be produced or underproduced (= underprovision because
of free-riding)
QUASI-PUBLIC GOODS: goods that are either non-exclusionary or non-rivalrous (i.e.
have one of the two characteristics of public goods)
GLOBAL PUBLIC GOODS: public goods that are global (in the sense that they do not
know borders) and face the same underprovision problem if their production is left up
to the market mechanism and therefore also require/ desire public interventions also
at the international level. These public goods can be global by nature or as a result of
globalization
TECHNOLOGIES OF PROVISION: the way in which individual contribution by states
or people are transferred into the global level of supply of that good (> how
individual contributions relate to the global provision)
Summation: the global supply is the sum of the individual contributions (ex.
individual initiatives to reduce pollution will help the global reduction) – idea
that everyone matters
Weakest link: irrespective of the individual efforts, the global level of
protection will be determined by the contribution of the weakest link, eg.
international financial stability
Best shot: the collective level of protection/ provision is determined solely by
the level of intervention of the one with the highest contribution
INTERNATIONAL FINANCIAL STABILITY: a global public good that requires public
intervention > when there is a liberalisation of cross-border investments, national
financial systems become intertwined and connected and as a result, a financial
crisis in country x can spill over in other countries and cause a global financial crisis
> mandate of IMF: to prevent a global financial crisis and ensure international
financial stability
OPTIMAL CAPITAL PROVISION: a global public good that requires public
intervention to ensure that funds worldwide are directed to places where they are
most needed > mandate of WB
MARKET FAILURE: a situation where the free market does not allocate resources
efficiently, leading to a loss of economic and social welfare.
BALANCE OF PAYMENTS: an accounting record that show for a specific country all
its (incoming and outcoming) cross-border/ international transactions with the rest of
1
, the world within a certain period (typically 1 year). The BoP consists of three main
parts: the current account + capital account + financial account -> the sum of these
parts should always be 0 meaning the the BoP is balanced!
Why? Because of double entry-booking: every single cross-border
transaction gives rise to both a debit and a credit entry with same number but
different sign (-)/(+) > one entry indicating the ‘nature’ of the transaction,
other one indicating the foreign exchange consequence (forex inflow or
outflow)
CAPITAL ACOUNT OPENNESS: the extent to which as a country you accept these
cross-border transactions/ investments etc. = country-policy decision to put yourself
open to receive those kind of transactions and allow your residents to do the same
abroad
FOREIGN EXCHANGE (FOREX): a currency that is used/ accepted in trade
worldwide (i.e. has international purchasing power) > this is a limited set of
currencies like the US dollar, the Euro, British pound, the Yen
Forex stock: total amount of of forex assets at a given moment
Forex flow: forex inflow and outflows > that leads to a change (increase/
decrease) in stock of forex reserves -> the BoP looks at the flows (all
transaction over a period)
INTERNATIONAL FINANCE (1): THE CASE FOR FREE CAPITAL
MOBILITY
CAPITAL ACCOUNT OPENNESS (sometimes also called financial globalization or
financial integration): the extent to which a country is allowing transborder financial
transactions (FDI, portfolio investments, other investments) -> this can be look at
from two perspectives:
De jure perspective: looks at policies and policy-decisions of the country >
what restrictions/ controls/ taxes/ ...are there? -> this can be ‘measured’ by
looking at reports (IMF reports are generally used for this)
De facto perspective: looks at actual transactions that can be observed ->
this can be ‘measured’ by looking at foreign assets and liabilities -> this can
be looked at from a flow perspective (what has come in and gone out during a
particular period) or from a stock perspective (what is the total amount we
have today, the accumulation of all the flows up until today, also by looking at
the EWN (IMF database))
FOREIGN ASSETS: what a country (or company/individual) owns abroad (e.g.,
foreign stocks, bonds, real estate) > outflows
FOREIGN LIABILITIES: what a country owes to foreigners (e.g., foreign-held
government debt, foreign direct investment in domestic firms) > inflows
The difference in foreign assets and foreign liabilities is the Net Foreign
Assets (NFA), this shows if a nation is a net lender/ net asset holder (positive
NFA) or net borrower/ net liability holder (negative NFA)
LUCAS PARADOX: you would assume that global capital would flow (more) from the
‘North’/ advanced economies to the ‘South’/ developing economies, i.e. from to
countries with relative capital abundance (hence lower expected returns) to countries
2
