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Topics in International
Economics
Ch 1. Introduction
T1: The U.S. as the largest debtor
The US current account deficit increased to $144
billion in 2004:Q1 from $127billion in 2003:Q4.
(US GDP in 2003: $11,000 billion)
• Why does it arise?
• Why does it matter?
Slide 1-2
 Net international investment position declines



each period by the amount of current account
deficit.
As a result of large current account deficits in the
1980s and ’90s, the US became the largest
debtor in the world.
NIIP of the US: -$2430 billion (2003)
-$2233 billion (2002)
It is important to compare these numbers to the
size of the economy.
Slide 1-3
T2:The euro
 The euro, introduced in 1999, became the
currency of 12 EU members.
• Germany, France, Italy, Belgium, Netherlands,
Luxemburg, Ireland, Spain, Portugal, Austria,
Finland, Greece
 What are the benefits and costs of the monetary

union (giving up own national currencies and
adopting a common currency)?
Why did the UK, Sweden, and Denmark opt out?
Slide 1-4
Dollarization
 In a different context, El Salvador has adopted


the US dollar as legal tender.
A new meaning of dollarization
Why would any country want to give up its own
currency and adopt some other country’s
currency?
Slide 1-5
T3: Exchange rate movements
Yr:Mo
¥/$
Yr:Mo
€/$
1968:07
360.0
1999:01
0.88
1978:10
176.0
1999:12
1.00
1985:02
259.5
2001:05
1.18
1997:04
126.9
2003:12
0.79
1998:07
143.7
2004:08
0.83
2004:08
111.4
2005:01
0.73
2005:01
103.4




Exchange rate
movements have been
large.
Can we explain them?
Are flexible exchange
rates more desirable than
fixed rates?
http://www.x-rates.com/
Slide 1-6
T4: Financial Crises
 Currency crises became more frequent.
• ERM (exchange rate mechanism), 1992
• Mexico, 1994
• East Asia, 1997
 Big devaluations and subsequent economic

collapses
How to explain currency crises? How to prevent
them?
Slide 1-7
T5: Choice of exchange rate regime





Chinese Renminbi had been pegged to the US dollar
since 1994 until recently.
Large trade surpluses of China became a political issue.
The US government and many economists recommend
increased exchange rate flexibility.
China revalued the RMB from 8.28 to 8.11 yuan per
USD on July 22, 2005. The currency has been on
managed float ever since.
What kind of exchange rate system would be most
appropriate for China?
Slide 1-8