What types of topics are subjects of international trade theory vs international monetary theory?
Two main branches of international economics:
- International trade theory: GEP
- gains from trade
- effects of gov. policies on trade (especially tariffs)
- patterns of trade
- International monetary theory: MEB
- macroeconomic stabilization policy in an open economy
- exchange rate determination
- balance of payments (trade and capital flows)
Why does international economics differ from macroeconomics?
Unique characteristics of international econimics relate to things that generally occur at the national level:
FML CFP
- fiscal policy decision made national level
- monetary policy applies at national level
- laws and regulations apply at national level
- currencies used at national level (exception: euro, CFA franc, OECS dollar)
- foreign exchange reserves held by national monetary authority
- public external debt
What is openness (as an economic concept)?
Trade openness is one measure of the extent to which a country is engaged in the global trading system.
trade openess = (exports + imports) / GDP
foreign exchange turnover = total money value of all transactions in a given period
1:12-15, 17
What is an exchange rate?
exchange rate is:
- price of international currencies
- measure how much domestic currency can be exchange for foreign currency
- Ea/b means the number of units of currency “a” per currency “b”
- for example, E$/€ is the number of dollars per euro
1: 18, 23
What does balances of payments refer to?
- value of exports and imports & value of financial assets and liabilities that flow into and out of a country
- records the FLOW of transactions with ROW during specified period
- remember, IAW bathtub model, stock is water in tub, flow is how much goes in/out during a specified period
- trade deficit = more imports than exports
- trade surplus = more exports than imports
1: 20, 2:6, 8-26
What is the official settlements balance?
how much the central bank acquires form (if positive) or spends (if negative) to settle transactions with other countries
1:10, 2:11
What are the balance of payments accounts? What are the identities?
- current account (CA): goods and services (imports and exports)
- capital account (KA): nonmarket, non-produced, or intangible assets
- finanical account (FA): financial assets (financial capital)
- net errors & omissions (E&O): residual
CA + KA - FA + E&O = 0 (standard treament)
CA + KA - FA + E&O = overall balance (analytical treatment)
overall balance tells you if a country’s central bank is accumulating or spending financial reserves
1:20, 2:6, 8-26
Floating vs fixed exchange rates?
floating exchange rates change based on foreign exchange market supply and demand
fixed exchange rates stay the same relative to a specific foreign currency for a specified period
1:23
What is the ROW?
- ROW is the rest of the world, i.e., external sector
- refers to a country’s trade in goods and services, income flows, transfer, financial claims and liabilities, i.e., BOP
- allows domestic economy to consume and invest more than it produces OR
- save some production for future generations, i.e., finance ROW absorption, thus accumulating claims on ROW’s future production
2: 4
What is absorption?
absorption is the total demand for final goods and services by residents
regardless of the country of origin of those goos and services
i.e., total spending
C + I + G
(consumption + investment + govt spending)
2:35
What is the international investment position?
- records the STOCK (level and composition) of a country’s foreign assets (claims on) and liabilities to ROW at a given POINT OF TIME
- it is a set of accounts (the NIIP is a number)
- remember, IAW bathtub model:
- stock is water in the tub at a specified point (IIP)
- flow is water going in/out over specified period (BOP)
2: 6, 28-30
What is the net international investment position?
- total assets (claims) - total liabilities
- NIIP is a number
- positive NIIP means net creditor to ROW
- negative NIIP means net debitor to ROW
- NIIP affected by changes in price of assets and exchange rates
What is the current account?
1) trade account, i.e., goods and services (imports and exports)
2) primary income account, i.e., transactions in factor services (labor generates wages, capital generates investment income)
3) secondary income account, i.e., transfers, e.g., gifts, grants, remittances
- non-produced capital, i.e., land, generates rents
What is the capital account?
- includes non-market, non-produced, or intangible assets
What is the financial account?
- financial assets, e.g., financial capital
1) direct investment, e.g., involves long-term ownership (10%) or control (50%) of an enterprise
2) portfolio investment, e.g., investment in stocks and bonds that does not convey significant influence or control
3) other investment, e.g., trade credits (export loan), bank loans, currency deposits
What are net erros and omissions?
- statistical discrepancy in the BOP
What are the official reserves?
- official reserves consist of assets held for the purpose of balance of pyaments stabalization, particularly to intervene in the foreign market
- standard account: included in the FA
- analytical account: included in the overall balance
What is double-entry accounting?
- every transaction included on both sides of the ledger, i.e., as a credit and a debit
- data verification device, i.e., both sides should be equal
- difference is entered as NE&O
Residents vs non-residents?
- external accounts record transactions ONLY between residents and non-residents, i.e., not between citizens and non-citizens
- residency is defined as the center of predominant economic interest
- residency established after one year for individuals and households
Stocks vs flows?
- bath-tub model
stock is the international investment positin (IIP)
- stock is amount of water in the tub at a given point
- measures the assets (claims on) and liabilities to ROW at a given point
flow is the balance of payments (BOP)
- flow is amount of water in/out time over specified period
- measures flow of international transactions with ROW over specified period
current accont
vs
capital account
vs
financial account?
these are the balance of payments (BOP) accounts
- current account (CA) records flow of goods and services (imports and exports)
- financial account (FA) records flow of financial assets (financial capital)
- captial account (KA) records flow of non-market, non-produce, or intangible assets (debt forgiveness, copyrights, and trademarks)
standard vs analytical treatment?
standard: CA + KA - FA + NE&O = 0
analytical: CA + KA - FA + NE&O = Overall Balance
- change in central bank reserves is the key component of the overall balance (as defined in the analytical treatment)
- official reserves consist of assets held for the purpose of BOP stabalization, particularly to intervene in the foreign exchange market)
- overall balance tells you if central bank is accumulating or spending official reserves
(2: 10, 47)
balance of payments
vs
balance of payments?
- set of accounts, i.e., CA, KA, FA
- overall balance/official settlements balance, i.e., CA + KA - FA + NE&O = Overall Balance (aka balance of payments)
(2: 11)
accrual
vs
cash account?
- accural accounting: records a transaction when it occurs, i.e., when an obligation is incurred
- cash accounting: records a transaction when it is paid for; causes problems b/c allows agrents to run arrears (late payments) w/o being noticed in accounts
(2: 13)
