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International Political Economy
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Lesson 1
Section 1.1
WHAT IS THE INTERNATIONAL
POLITICAL ECONOMY?
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• Economies in which the relations with foreign
plays a prominent role are said to be open.
• The analysis of such economies requires that
considerable attention be paid to government
decisions
• Particularly, this role is critical in field as:
– International trade
– Balance of payment and your deficit/surplus
– Fiscal and monetary policy
– Interest rate
–…
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• The discipline that analyzes the
government role in economies is the
Political Economy
• The discipline that studies how the
government decisions have effect with
international trade and economic relations
with rest of world is named International
Political Economy (IPE)
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• Economics
– Microeconomics (individual decisions
and behaviour)
– Macroeconomics (aggregate decisions
and collective behaviour)
• Political Economy (economic role of
government)
– International Political Economy (economic role
of government in international field)
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Course Outline
•
•
•
•
•
•
Quantitative Dimensions of Globalization
Budget Deficit and Public Debt
The Balance of Payments
Political economics in Open Economy
Purchasing Power Parity
Interest Rate Parity
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Lesson 1
Section 1.2
DATA SOURCES
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IMF
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World Bank
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OECD
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Central Banks
(http://centralbank.monnaie.me/)
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Federal Reserve
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ECB
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Eurostat
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Banca d’Italia
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People’s Bank of China
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ISTAT
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Lesson 1
Section 1.3
GDP: THE PRESENT AND
NEXT FUTURE
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GDP
14,000,000
billions US$
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
0
1980
1985
1990
1995
2000
Canada
France
Germany
Italy
Japan
United Kingdom
United States
China
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2005
GDP
5,000,000
4,500,000
4,000,000
billions US$
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
1990
Canada
1992
France
1994
1996
1998
Germany
Italy
2000
Japan
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2002
2004
2006
United Kingdom
2008
China
GDP
40
35
30
percent
25
20
15
10
5
0
1950
1960
1970
1980
Western Europe
Oceania
Asia
Middle East
1990
2000
North America
Eastern Europe and Central Asia
Latin America
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GDP
Peso percentuale sul PIL mondiale
35
30
25
20
15
10
5
0
1900
1920
Europe
1940
USA
1960
China
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1980
India
Japan
2000
percentuale di PIL per area geografica
rispetto al PIL mondiale
GDP
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1950
1960
1970
1980
1990
2000
Western Europe
North America
Oceania
Eastern Europe and Central Asia
Asia
Latin America
Middle East
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2009
GDP
contributo dei singoli paesi al PIL
dell'area
80
70
15
60
50
40
30
20
10
22
4
16
3
14
12
5
6
13
9
6
14
11
12
13
12
15
19
19
18
17
14
13
13
14
1950
1960
1970
1980
10
8
15
12
20
19
14
16
15
1990
2000
2009
0
France
Germany
Italy
Spain
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United Kingdom
GDP
Contributo dei singoli paesi al PIL
dell'area
90
80
2
70
20
3
2
40
28
6
27
39
50
5
38
23
33
7
6
23
30
6
5
7
18
15
5
18
17
15
43
20
10
5
13
60
8
4
24
24
1950
1960
19
19
23
1970
1980
1990
30
0
China
India
Indonesia
Japan
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2000
South Korea
2009
GDP
Contributo dei singoli paesi al PIL
dell'area
100
90
80
70
8
8
7
7
23
25
25
22
6
5
6
3
8
4
7
5
8
6
26
28
35
35
33
33
18
16
13
10
11
12
1960
1970
1980
1990
2000
2009
10
12
11
18
19
21
7
6
6
5
60
50
40
30
23
20
10
22
0
1950
Argentina
Brazil
Chile
Colombia
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Mexico
Venezuela
GDP: BRICs
9,000,000
8,000,000
PIL in US$ 1990 PPA
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
1950
1960
1970
Russian Federation
1980
China
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1990
India
2000
Brazil
2010
GDP: G7 vs BRICs
PIL in milioni di US$ 1990 PPA
16,000,000
14,000,000
12,000,000
10,000,000
8,000,000
6,000,000
4,000,000
2,000,000
1950
1960
1970
G-7
1980
BRICs
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1990
2000
2010
GDP per capita: Europe (and Canada and
Japan) vs USA
100.00
Reddito pro-capite (reddito USA=100)
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
1950
1960
France
1970
West Germany
1980
Italy
1990
United Kingdom
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2000
Canada
2010
Japan
GDP per capita: All vs USA
Reddito pro-capite (reddito USA=100)
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
1950
1960
1970
1980
Western Europe
Eastern Europe and Central Asia
Latin America
Africa
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1990
Oceania
Asia
Middle East
2000
2010
Lesson 2
Secion 2.1: Introduction
BUDGET DEFICIT AND THE
NATIONAL DEBT
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• Upon completion of this chapter you
should
– know what's involved in calculating the
structural deficit, a deficit measure designed
to provide a more accurate view of the extent
to which we should worry about the size of the
deficit; and
– recognize the circumstances in which an
increase in the national debt can be viewed
as a burden on future generations.
• When government spending exceeds tax
revenues, there is a government budget deficit,
which is financed by selling bonds.
• The sum of all outstanding government bonds is
called the national debt, which grows each year by
the amount of the budget deficit. (It would shrink if
there were a budget surplus.)
• Some bonds are sold to the central bank, an agent
of the government, so this part of the national debt
the government owes to itself; consequently,
nobody worries about it.
• The remaining bonds are sold to the public,
augmenting the publicly held national debt
• An important legacy of
Keynes is that budget
deficits became respectable
side effects of efforts to
keep an economy operating
at full employment.
• Keynes's intention was that
deficits required to stimulate
the economy when it is in
recession would be offset by
budget surpluses in times of
full employment, ensuring
that in the long run the
national debt would not
continually grow.
Lesson 2
Section 2.2 : Recall on AD
BUDGET DEFICIT AND THE
NATIONAL DEBT
AD
AD3
AD2
AD1
Y
Y1
Y2
Y3
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AD
AD*
AD3
AD2
AD1
Y1
Y2
Y3
Y*
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Y
AD
AD*
C+I
C
ADc+I
ADc
C0+I0
C0
I0
I
YC
YC+I
Y*
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Y
AD
C+I+G
AD*
C+I
C
ADc+I
ADc
C0+I0
C0
I0
I
YC
YC+I
Y*
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Y
AD
(C + I + G)inf
AD**
C+I+G
AD*
C+I
C
ADc+I
ADc
C0+I0
C0
I0
I
YC
YC+I
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Y*
Y
AD
(C + I + G)**
AD**
C+I+G
ADinf
AD*
C+I
C
ADc+I
ADc
C0+I0
C0
I0
I
YC
YC+I
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Y*
Y**
Y
Lesson 2
Section 2.3: Budget deficit (causes and effects)
BUDGET DEFICIT AND THE
NATIONAL DEBT
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Growing deficit responsabilities
• Three main culprits were responsible for the growing deficit
•
1. Tax decreases.
– The ratio of tax revenue to GDP is about 30 percent in the United States,
the lowest of all OECD countries. Canada's ratio is about 40 percent, and
Sweden's is about 50 percent.
•
2. Growing entitlement expenditures.
– Social Security and Public Health Service expenditures cannot easily be
controlled because anyone eligible is entitled to coverage. As our
population ages, spending in these two categories continually increases,
with politicians refusing to increase taxes to pay for it.
•
3. Higher interest payments.
– Because of higher interest rates and a higher national debt, interest
payments as a fraction of government spending have jumped from about 9
percent to about 13 percent. Recent decreases in interest rates have
alleviated this burden considerably.
Budget deficit: costs and benefits
• Budget deficits carry both costs and benefits
for the economy. Any assessment of their
desirability must weigh these costs and
benefits carefully.
1. Lower unemployment
2. Public investment
3. Lower national saving
4. International implications
5. Debt monetization
6. Growing national debt
• Especially, growing national debt.
– Continued budget deficits increase the national
debt. A growing national debt has several
important implications:
• a. A growing national debt means growing interest payments on
that national debt. Over time, the interest payments may become
a sufficiently large fraction of the government's financing needs
that they render fiscal policy inflexible. Fiscal policy to attack
unemployment, for example, may not be undertaken because
financing is not available.
• b. A growing national debt inevitably means that tax rates rise as
much as politicians dare, to facilitate handling the high interest
payments. Tax increases create disincentive effects, as
emphasized by the supply-siders.
• c. A growing national debt means that we may be placing a
burden on future generations who will inherit that debt. Many view
this practice as morally wrong. d. A national debt could grow to the
point where it will become too large for the country to service,
causing a major crisis in the economy. One way of measuring
whether an economy is headed in this direction is to calculate the
structural deficit.
• The structural deficit is the part of the current budget that in the long
run increases the ratio of the publicly held national debt to nominal
GDP.
• Three adjustments must be made to the current budget deficit to
calculate the structural deficit:
–
1. A correction is needed for cyclical effects that hinder the current deficit's
ability to reflect any long-run trend accurately. For example, if GDP drops below
its long-run trend average by $100, it is estimated that tax receipts fall by $25
and government spending on transfers increases by $8, so that $33 of the deficit
does not correspond to long-run behavior. It should be noted that there is not a
universal definition of the structural deficit. Some textbooks define it as involving
only this cyclical adjustment.
– 2. A correction is needed for real growth and inflation because if nominal GDP is
growing the publicly held debt can grow without affecting their ratio.
– 3. A correction is needed for seigniorage. Each year, an increase in the money
supply is required to accommodate money demand increases, allowing the
government to finance some of its deficit by printing money. This financing does
not affect the publicly held debt.
• Correction for cyclical effects
– The economy is currently experiencing an unemployment rate
greater than its long-run average, so part of the current deficit
does not reflect the long-run contribution of the deficit to the
national debt.
• Correction for nominal growth
– Nominal GDP—the denominator of the ratio of the publicly held
debt to GDP—is growing, so the numerator can grow at the
same rate without increasing this ratio
• Correction for seigniorage.
– Each year the central bank increases the money supply to
accommodate the economy's nominal growth. This increase
allows some of the deficit to be financed by selling bonds to the
central bank (printing money) rather than to the public. These
bond sales do not affect the publicly held debt and thus do not
affect the ratio of the publicly held debt to GDP
Budget deficit and future generations
• The question of whether
a burden is being passed
on to future generations
is best addressed by
examining the capital
stock that is being passed
on at the same time. Let
us examine this issue first
by assuming only
domestic borrowing and
second by assuming
borrowing from foreigners
Domestic budget deficit
• If the borrowing is domestic, then we owe the
debt to ourselves, and it seems that overall
there is no intergenerational burden.
• This reasoning is misleading, however.
• Domestic borrowing to finance a deficit
crowds out some investment spending.
• If the deficit spending is on capital assets
such as roads and airports, it is possible that
the capital stock passed on to the future
generation is of more value than the
investment spending that is crowded out
Budget deficiti for foreigners
• The great advantage of borrowing from foreigners is that
crowding out can be avoided.
• The foreign exchange obtained by the borrowing can be used
to import more goods and services, allowing the economy to
have extra output to distribute to its citizens.
• In this case, however, future generations must pay interest
and principal to foreigners, so it looks as though they are
being burdened.
• Once again, though, this conclusion depends on the nature of
the deficit spending. If the government has borrowed to invest
in social infrastructure that increases the economy's
productivity by enough to create additional annual income
sufficient to pay off the interest and principal of the debt, then
the deficit cannot be said to burden future generations.
Lesson 2
Section 2.4: the Twin Deficit
BUDGET DEFICIT AND THE
NATIONAL DEBT
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USA
90
80
70
60
50
40
30
20
10
0
1990
-10
1992
1994
1996
1998
2000
General government gross debt
2002
2004
2006
Current account balance
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2008
China
percent of GDP
18
13
8
3
1990
-2
1992
1994
1996
1998
General government gross debt
2000
2002
2004
2006
Current account balance
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2008
Germany
85
75
percent of GDP
65
55
45
35
25
15
5
-51991
1993
1995
1997
1999
General government gross debt
2001
2003
2005
Current account balance
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2007
2009
Italy
115
percent of GDP
95
75
55
35
15
-51990
1992
1994
1996
1998
General government gross debt
2000
2002
2004
2006
Current account balance
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2008
India
75
percent of GDP
65
55
45
35
25
15
5
-51991
1993
1995
1997
1999
General government gross debt
2001
2003
2005
Current account balance
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2007
2009
Japan
250
percent of GDP
200
150
100
50
0
1990
1992
1994
1996
1998
General government gross debt
2000
2002
2004
2006
Current account balance
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2008