International Economics

LESSEN HERBEKEKEN

LES 1:


INTERNATIONAL ECONOMICS: A GLOBAL PUBLIC GOODS APPROACH

BOP: format for a particular country with which you can observe and measure cross-
border movements (finance, trade, …).

GLOBAL PUBLIC GOODS:

Public goods:

 Goods of services have 2 characteristics
o Non-exclusion
 Once the good is produced you can’t be excluded from
consuming/enjoying the good/service
 Even if you are not willing to pay for it
o Non-rivalry in consumption
 This means that even if I consume the good that does not
influence/change your ability to also consume the good
o Example pure public good: clean air, lightning for the streets
 Desirable goods and services that cannot be efficiently produced by the
market mechanism
o The market mechanism can only be used to make sure that we have a
supply of these desirable things in a sufficient way
o This is because free riding

Opposite: private goods

 Goods and services that are produced by the market, by private markets
 Market based goods
 Typically, a good for which there is exclusion possible
o You’re only allowed to consume the good if you buy it, if you’re
prepared to pay for it
 Typically produced by the market system, I buy it, I consume it, it’s gone, no
one else can consume it




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,Quasi-public goods or joint products:

 They have only one of the 2 characteristics, but not the other one
o Territories on the world that are not part of a country (common pool
problems), they can be used by everyone (non-exclusion), but if
everyone has access to them, everyone is going to use them and then
you will have complete deplusion
o NATO, easy to excluse because you need to become a member, but
once you are a member than you have features of non-rivalry
 Joint product (little bit of public good & private good)
o Education, public transportation, etc.

Free rider behavior:

 You cannot be forced to pay for things while using public goods
 Private actors will not be interested in making these goods because they can’t
force you to pay for it
o So, several goods and services will be under provided if you solely rely
on the market mechanism, because of the specific features of public
goods
 You need other actors to step in, to provide these desirable goods and
services and so you come to the public sector
o The public sector steps in to make sure that these desirable services
are supplied in a sufficient matter
 A public actor has its way to force people to contribute to the financing of the
desirable services through the public sector
o  funds collected from taxes
 We can rely on institution, on rules, agreement of a public nature to step in
and overcome that market failure

Application to global context:

Global public goods (GPGs)

 Some market failures cannot only be cured at the national levels because of a
number of the problems have cross-border dimensions
o For example: pollution (clean air)
 This has a global nature, pollution is not stopping at the border of
the next country
 Some of these desirable goods and services that are under produced can best
be tackled by the same reason as with free riding (states that are freeriding)
o To solve that kind of failure you need interventions at a supranational
level
o Install institutions at an international level



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,Different technologies of provision:

 Technology of provision is the way of how individual contributions translate in
the global total supply
 The technology will determine what kind of intervention mechanism will be
most effective and efficient
 1: Summation
o The total supply is the sum of all the individual contributions
o Pollution is produced by summation
o What you do, your effort matters in reducing pollution
o Determined by the sum of our individual effort
o Everyone is important, everyone matters
o Policy consequence
 What would you advice as a global institution?
 Everyone has to contribute, because everyone is important, we
do this together
o But there are particular global goods that are produced by different
types of technologies, such as the weakest link
 2: Weakest link
o The total effect is determined by the contribution of the weakest, the
one who is contribution the least
o Example of the island surrounded by the sea
o Global financial stability (the protection of a global financial crisis) has a
lot of features of this weakest link
 We have one global financial market, the level of protection of
the world against a global crisis is the country with the highest
probability of a financial crisis, because if it happens in one
country while there is a global financial institute, it will spill over
to other countries
 3: Best shot
o The opposite of the weakest link
o The total gain will be determined by the one who is making the biggest
effort
o Example: the development of new drugs, vaccines for instance
 Some have much better track records, scientists, etc., so they
have much better chance of making a vaccine
o The policy consequences:
 You can’t give everyone money, because you have a different
success rate so it’s better to give the money to the one who has
the highest chance of being successful




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, The concept of the Balance of Payments

BoP:

 An accounting record of all actions between residents of a country vis a vis the
rest of the world
 Deals only with cross national transactions
 Typically you measure it over a period of 1 year
 Constructed of a number of big parts (traditionally 2 big parts) and together
they make up to the BoP and in accounting terms they sum up to 0:
o Current account
o Capital account




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