Download Eco 460: International Finance Administrivia Readings

Eco 460:
International
Finance
Lecture 1:
Introduction to
International
Economics and
Finance
Spring 2007
Lecture 1
2/40
Administrivia
• Course: Eco 460: International Finance
• Lectures: M/W/F 9:10 a.m.–10:10 a.m.
(Crounse 301)
• Office hours: M/F 10:30 a.m.–12:30 p.m.
(Crounse 421)
• Contact: [email protected]
• Course webpage:
http://web.centre.edu/jamus.lim/teaching/eco460.html
• Course requirements:
– 4 problem sets (20%), 1 midterm (30%), 1 final (30%)
– Participation (20%): Experiments (5%), case study
(5%), IMF mission simulation (5%), discussion (5%)
• Elements of (lecture) style
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Readings
• Required
– K&O Ch. 1, 12
– Chinn & Steil (2006)
• Recommended
– Fieleke (1996)
– Higgins & Klitgaard (1998)
– Mann (2002)
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Why International Economics?
Consider the humble T-shirt
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Why International Economics?
• International trade is an increasingly
important part of the U.S. economy
– Net exports have increased fivefold between
1960 and 2005
– The U.S. moved from a net exporter to
importer in the mid-1970s
– The share of trade in the U.S. economy has
increased threefold in the past 40 years
– Trade deficit with China: $232.5 bio
(2006)/$83.8 bio (2000)
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Why International Economics?
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Spring 2007
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Why International Economics?
• International trade is an increasingly
important part of the U.S. economy
– Net exports have increased fivefold between
1960 and 2005
– The U.S. moved from a net exporter to
importer in the mid-1970s
– The share of trade in the U.S. economy has
increased threefold in the past 40 years
– Trade deficit with China: $232.5 bio
(2006)/$83.8 bio (2000)
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Why International Economics?
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Why International Economics?
Consider the humble dollar
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What is International Economics?
• Definition: The study of interactions between
nations via international trade (real) and
international finance (monetary)
• Core themes:
–
–
–
–
–
–
–
Gains from Trade
Pattern of Trade
How Much Trade?
Balance of Payments
Exchange Rate Determination
International Policy Coordination
International Capital Market
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Themes in International Finance
1. Balance of payments
– Is it good or bad to run a trade deficit?
•
•
Counterpart to a current account deficit is a
capital account surplus
Or, a current account surplus implies a capital
account deficit
– How do we calculate the balance of
payments?
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Themes in International Finance
2. Exchange rate determination
– Countries have independent currencies, for
which their relative values can change
– What determines exchange rates?
•
•
•
•
•
Interest rates
Money supply
Prices
Macroeconomic variables
Exchange rate regimes
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Themes in International Finance
3. International policy coordination
– International macroeconomic policy
coordination
•
•
International financial arrangements: Multilateral
and plurilateral
Examples: IMF/BIS, G7, G3
– Globalization and Bretton Woods regime
•
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Anti-globalization protests
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Themes in International Finance
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Themes in International Finance
4. International capital market
–
–
Absent financial policy, determined mainly by
returns
Regulations on international investment
•
–
Capital controls, foreign exchange regimes
Financial policy questions: If a government must
restrict finance…
•
Which regime should it use?
•
By how much should it engage in foreign exchange
intervention?
•
What are the costs and benefits of a given regime?
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Linkages Between Trade, Finance,
and Politics
• Linkages between trade and finance
– International trade focuses on transactions
of real goods and services (tangible commitments of
resources) through across nations
– International finance focuses on financial or monetary
transactions across nations
• Linkages between international economics and
politics
– Trade and financial policies often driven by domestic
interests
– Politics may lead to deviations from optimal
macroeconomic outcome
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National Income Accounting
• Definition: National income
– Income earned by a country by its factors of
production over a given time period
– Equivalent to national product, after
adjustments
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National Income Accounting
•
National income ≡ National product
adjustments
1. Depreciation
2. Foreign transfers
3. Indirect taxes
•
Components of GNP
1.
2.
3.
4.
Consumption
Investment
Government purchases
Current account balance
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National Income Accounting
National income ≡ National product
adjustments
•
1. Depreciation
2. Foreign transfers
3. Indirect taxes
•
Components of GNP
1.
2.
3.
4.
Consumption
Investment
Government purchases
Current account balance
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National Income Accounting
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National Income Accounting
2%
1%
0%
-1% 1960
1965
1970
1975
1980
1985
1990
1995
2000
-2%
-3%
-4%
-5%
-6%
Year
Source: Bureau of Economic Analysis, US Department of Commerce
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National Income Accounting
•
National income identity
Y =C +I +G
Y =C +I +G+X −M
closed economy
open economy
Domestic absorption Current account balance
•
Importance of current account
1. ∆CA correlated ∆Y
2. ∆CA = ∆Net foreign wealth
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National Income Accounting
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National Income Accounting
• National saving
S =Y −C −G
⇒ S = I + CA
⇒ S p = I + CA + (G − T )
Government budget deficit
• Twin deficits hypothesis
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National Income Accounting
US current account and public saving relative to GDP,
1960-2004
Percent of GDP
4%
2%
0%
-2%
-4%
-6%
-8%
1960
1965
1970
1975
1980
current account
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1985
1990
1995
2000
public saving
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Balance of Payments
• Components of BOP
1. Current account
2. Financial account
3. Capital account
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Balance of Payments
• Double-entry bookkeeping requires paired
credit/debit for international transactions
• Fundamental balance of payments identity
CA + F A + KA = 0
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Balance of Payments
• Subcomponents of BOP
1. Current account
• Exports
• Imports
• Net current transfers
2. Capital account
• Net capital transfers
3. Financial account
• Outflow
• Inflow
4. Statistical discrepancy
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Balance of Payments
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Balance of Payments
• Subcomponents of BOP
1. Current account
• Exports
• Imports
• Net current transfers
2. Capital account
• Net capital transfers
3. Financial account
• Outflow
• Inflow
4. Statistical discrepancy
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Balance of Payments
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Balance of Payments
• Subcomponents of BOP
1. Current account
• Exports
• Imports
• Net current transfers
2. Capital account
• Net capital transfers
3. Financial account
• Outflow
• Inflow
4. Statistical discrepancy
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Balance of Payments
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Application: Current Account
Imbalances
“The United States has never run such large current
account deficits and no single nation’s deficit has ever
bulked nearly as large relative to the global economy.”
Former Treasury Secretary Larry Summers, Oct 3, 2004
“The imbalances between the United States and the rest of
the world are not sustainable over the long term. The risk
is that if nothing is done to reduce them gradually, they will
instead be reduced suddenly, and in a disruptive way.”
IMF Managing Director Rodrigo de Rato, Feb 26, 2007
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Application: Current Account
Imbalances
• U.S. current account balance (2005):
–$791,508 mio
– 6.2% GDP
– Exports: $1,749,892 mio
– Imports: –$2,455,328 mio
• U.S. international investment position (2005):
–$2,546 bio
• The $790 billion dollar question: Is this
sustainable?
– Does the deficit matter? What to do?
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Application: Current Account
Imbalances
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Application: Current Account
Imbalances
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Application: Current Account
Imbalances
• U.S. current account balance (2005):
–$791,508 mio
– 6.2% GDP
– Exports: $1,749,892 mio
– Imports: –$2,455,328 mio
• U.S. international investment position (2005):
–$2,546 bio
• The $790 billion dollar question: Is this
sustainable?
– Does the deficit matter? What to do?
Spring 2007
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Application: Current Account
Imbalances
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Spring 2007
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Application: Current Account
Imbalances
• U.S. current account balance (2005):
–$791,508 mio
– 6.2% GDP
– Exports: $1,749,892 mio
– Imports: –$2,455,328 mio
• U.S. international investment position (2005):
–$2,546 bio
• The $790 billion dollar question: Is this
sustainable?
– Does the deficit matter? What to do?
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