UNIVERSITY OF ANTWERP
INTERNATIONAL ECONOMICS AND
INTERNATIONAL ECONOMIC ORGANISATIONS
ACADEMIC YEAR 2021-2022
PROF. DANNY CASSIMON
PROF. GEORGE MAVROTAS D.L.Y.
, Summary D.L.Y.
CHAPTER ONE
INTRODUCTION
1. International economics: a ‘global public goods’ approach
● Basic characteristics of a (pure) public good (e.g. clean air, public lighting)
○ Non-exclusion (people cannot be excluded from consuming the good and its benefits)
○ Non- rivalry in consumption (the good remains, one’s consumption doesn’t mean the good is gone)
⇨ Cannot rely on the market mechanism because no one wants to pay for the production
● In practice
○ A lot of quasi-public goods or ‘joint products’
■ Quasi-public: one of the two
■ Joint products: produced by private institutions, but have a public aspect (e.g. public transport)
○ Basic problem: underprovision due to free-riding (usage of the product without paying)
○ To overcome underproduction → rules and institutions
■ Government will step in and finance production (with taxes)
■ Public intervention is needed to ensure that they are produced in sufficient quantity so that
everyone can enjoy them
● Application to global context: global public goods (GPGs)
○ Transnational products (don’t stop at borders) → need a worldwide solution
○ Due to globalisation national public goods are becoming global public goods (e.g. pollution)
○ Different technologies of production (e.g. summation, weakest link, best shot)
■ Summation: adding up all contributions, the total is the sum of all individuals (e.g. pollution, your
pollute adds up to pollution, if you pollute more, the contribution to the total is higher)
■ Weakest link: you are just as strong as your weakest link, the total of all contributions is only that of
the one that does the least
● e.g. all on an island surrounded by water, all have own part and everybody’s part borders the
water → biggest danger is rising waters because of floodings → build a dam, some build very
high walls, some build lower ones, some might not at all build a dam → we will all drown: the
protection total is the protection level of the weakest link
● e.g. international financial stability → the global public bad is that we try to avoid it, if there is a
financial crisis in one country, there will be problems and eventually will spill over to other
countries → global financial crisis (because of globalisation and cross-border financial deals,
global good → focus on weakest link (global financial crisis started in US)
■ Best shot: total is determined by the effort of the strongest / the one with the highest contribution
(e.g. finding new vaccines or drugs → if we need a result, we should focus our efforts at the ones who
have the biggest chance of success, not useful to spread resources on all pharmacies)
1
, Summary D.L.Y.
⇨ All technologies have other policy consequences
● Application to international economics
○ Rules on trade
○ International financial stability, optimal capital provision
■ Optimal capital provision: everyone should have the capital to develop themselves properly →
need public institutions to invest in developing countries so that they are not excluded
● Application to institutions
○ International trade issues: the WTO
○ International Finance: IMF / World Bank
2. The concept of the Balance of Payments
● 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 one year)
○ BoP is reflecting all the cross-border financial activities, not domestic payments
○ Important in international economic
● BoP ‘identity’
○ Current account + capital (and financial) account = 0
■ BoP split in three parts
■ Capital account openness: a country allowing for these transactions to take place and the extent to
which it is allowed ( = financial account)
2.1. (Im)balances
● 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, other
one indicating the foreign exchange consequence (forex inflow of outflow)
○ e.g. for every cross-border transaction, there will be two separate entries of the same value with a different
sign → the credit and debit should always be the same and thus equal zero
○ e.g. Tanzania is exporting coffee → booking one ‘export of goods’ and booking two ‘incoming payment of
dollars’
● General rule
○ Everything leading to forex (foreign exchange) inflows is + → so forex inflow itself is -
○ Everything leading to forex (foreign exchange) outflows is - → so forex outflow itself is +
● Credit and debit
○ Credit (+): exports, income and current transfers received, decrease of foreign assets, increase of foreign
liabilities
2
, Summary D.L.Y.
○ Debit (-): imports, income and current transfers paid, increase of foreign assets, decrease of foreign
liabilities
● But: each of the different BoP components individually can be unbalanced (surpluses / deficits → but
together in BoP the result should always be zero
○ In reality, of course, errors are made: balancing item ‘errors and omissions’ added to BoP
○ Errors and omissions bigger → says something about the quality of the system, but also the formality of
the transaction
Example
Current account
1. Net exports of goods and services (e.g. trade balance exports of 500 and imports of -800) - 300
2. Net income received from abroad (compensation of employees and investment income) - 100
3. Net current transfers (e.g. official development aid, workers remittances, …) 150
4. Current account balance ( = 1 + 2 + 3) - 250
Capital account
5. Net capital transfers (e.g. debt forgiveness, …) 50
6. Acquisition / disposal of non-produced, non-financial assets (e.g. patents, leases, …) 30
7. Capital account balance ( = 5 + 6) 80
Financial account
8. Net direct investment 80
9. Net portfolio investment 70
10. Net other investment 100
11. Change in reserve assets (forex, gold, SDRs) - 70
12. Financial account balance ( = 8 + 9 + 10 + 11) 180
Net errors and omissions ( = - 4 - 7 - 12) - 10
2.2. Economic perspective on BoP
● Concept of the overall (or global) balance
Overall balance (above-the-line) + 70
= current account + capital account + financial account balance (excluding changes in reserve assets, line 11) +
net errors and omissions
Financing (below-the-line) - 70
= change in reserve assets, line 11 (including exceptional financing)
3
INTERNATIONAL ECONOMICS AND
INTERNATIONAL ECONOMIC ORGANISATIONS
ACADEMIC YEAR 2021-2022
PROF. DANNY CASSIMON
PROF. GEORGE MAVROTAS D.L.Y.
, Summary D.L.Y.
CHAPTER ONE
INTRODUCTION
1. International economics: a ‘global public goods’ approach
● Basic characteristics of a (pure) public good (e.g. clean air, public lighting)
○ Non-exclusion (people cannot be excluded from consuming the good and its benefits)
○ Non- rivalry in consumption (the good remains, one’s consumption doesn’t mean the good is gone)
⇨ Cannot rely on the market mechanism because no one wants to pay for the production
● In practice
○ A lot of quasi-public goods or ‘joint products’
■ Quasi-public: one of the two
■ Joint products: produced by private institutions, but have a public aspect (e.g. public transport)
○ Basic problem: underprovision due to free-riding (usage of the product without paying)
○ To overcome underproduction → rules and institutions
■ Government will step in and finance production (with taxes)
■ Public intervention is needed to ensure that they are produced in sufficient quantity so that
everyone can enjoy them
● Application to global context: global public goods (GPGs)
○ Transnational products (don’t stop at borders) → need a worldwide solution
○ Due to globalisation national public goods are becoming global public goods (e.g. pollution)
○ Different technologies of production (e.g. summation, weakest link, best shot)
■ Summation: adding up all contributions, the total is the sum of all individuals (e.g. pollution, your
pollute adds up to pollution, if you pollute more, the contribution to the total is higher)
■ Weakest link: you are just as strong as your weakest link, the total of all contributions is only that of
the one that does the least
● e.g. all on an island surrounded by water, all have own part and everybody’s part borders the
water → biggest danger is rising waters because of floodings → build a dam, some build very
high walls, some build lower ones, some might not at all build a dam → we will all drown: the
protection total is the protection level of the weakest link
● e.g. international financial stability → the global public bad is that we try to avoid it, if there is a
financial crisis in one country, there will be problems and eventually will spill over to other
countries → global financial crisis (because of globalisation and cross-border financial deals,
global good → focus on weakest link (global financial crisis started in US)
■ Best shot: total is determined by the effort of the strongest / the one with the highest contribution
(e.g. finding new vaccines or drugs → if we need a result, we should focus our efforts at the ones who
have the biggest chance of success, not useful to spread resources on all pharmacies)
1
, Summary D.L.Y.
⇨ All technologies have other policy consequences
● Application to international economics
○ Rules on trade
○ International financial stability, optimal capital provision
■ Optimal capital provision: everyone should have the capital to develop themselves properly →
need public institutions to invest in developing countries so that they are not excluded
● Application to institutions
○ International trade issues: the WTO
○ International Finance: IMF / World Bank
2. The concept of the Balance of Payments
● 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 one year)
○ BoP is reflecting all the cross-border financial activities, not domestic payments
○ Important in international economic
● BoP ‘identity’
○ Current account + capital (and financial) account = 0
■ BoP split in three parts
■ Capital account openness: a country allowing for these transactions to take place and the extent to
which it is allowed ( = financial account)
2.1. (Im)balances
● 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, other
one indicating the foreign exchange consequence (forex inflow of outflow)
○ e.g. for every cross-border transaction, there will be two separate entries of the same value with a different
sign → the credit and debit should always be the same and thus equal zero
○ e.g. Tanzania is exporting coffee → booking one ‘export of goods’ and booking two ‘incoming payment of
dollars’
● General rule
○ Everything leading to forex (foreign exchange) inflows is + → so forex inflow itself is -
○ Everything leading to forex (foreign exchange) outflows is - → so forex outflow itself is +
● Credit and debit
○ Credit (+): exports, income and current transfers received, decrease of foreign assets, increase of foreign
liabilities
2
, Summary D.L.Y.
○ Debit (-): imports, income and current transfers paid, increase of foreign assets, decrease of foreign
liabilities
● But: each of the different BoP components individually can be unbalanced (surpluses / deficits → but
together in BoP the result should always be zero
○ In reality, of course, errors are made: balancing item ‘errors and omissions’ added to BoP
○ Errors and omissions bigger → says something about the quality of the system, but also the formality of
the transaction
Example
Current account
1. Net exports of goods and services (e.g. trade balance exports of 500 and imports of -800) - 300
2. Net income received from abroad (compensation of employees and investment income) - 100
3. Net current transfers (e.g. official development aid, workers remittances, …) 150
4. Current account balance ( = 1 + 2 + 3) - 250
Capital account
5. Net capital transfers (e.g. debt forgiveness, …) 50
6. Acquisition / disposal of non-produced, non-financial assets (e.g. patents, leases, …) 30
7. Capital account balance ( = 5 + 6) 80
Financial account
8. Net direct investment 80
9. Net portfolio investment 70
10. Net other investment 100
11. Change in reserve assets (forex, gold, SDRs) - 70
12. Financial account balance ( = 8 + 9 + 10 + 11) 180
Net errors and omissions ( = - 4 - 7 - 12) - 10
2.2. Economic perspective on BoP
● Concept of the overall (or global) balance
Overall balance (above-the-line) + 70
= current account + capital account + financial account balance (excluding changes in reserve assets, line 11) +
net errors and omissions
Financing (below-the-line) - 70
= change in reserve assets, line 11 (including exceptional financing)
3
