Transcript Chapter1 - YSU

International Finance
Chapter 1
The Global Macroeconomy
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Chapter Outline
• Foreign exchange: currencies and crises
• Globalization of finance: debts and deficits
• Government and institutions: Policies and
Performance
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Intro to International Macroeconomics
• large-scale economic problems in global
interdependent economies.
• key economy-wide variables such as exchange
rates, prices, interest rates, income, wealth, and
the current account.
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Foreign Exchange: Currencies and Crises
• Countries have different currencies, therefore a complete
understanding of how a country’s economy works requires
that we study the exchange rate (the price of foreign
currency).
• Because products and investments move across borders,
fluctuations in exchange rates have significant effects on
the relative prices of home and foreign:
o goods (such as autos and clothing),
o services (such as insurance and tourism), and
o assets (such as equities and bonds).
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Foreign Exchange: Currencies and Crises
• How Exchange Rates Behave
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Foreign Exchange: Currencies and Crises
Questions • How are exchange rates determined?
• Why do some exchange rates fluctuate sharply in the short
run, while others are almost constant?
• Can exchange rates be forecast in the long run?
• How do exchange rates affect the real economy?
• How do changes in exchange rates affect the values of
foreign assets, and hence national wealth?
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Foreign Exchange: Currencies and Crises
• In an exchange rate crisis a currency experiences a
sudden and pronounced loss of value against another
currency following a period in which the exchange rate had
been fixed or relatively stable.
• There have been more than 27 exchange rate crises in the
12-year period from 1997 to 2011.
• In some cases, including Argentina in 2002, exchange rate
crisis lead to governments declaring default (i.e., a
suspension of payments).
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Foreign Exchange: Currencies and Crises
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Foreign Exchange: Currencies and Crises
• Governments in crisis may appeal for external help from
international development organizations, such as the
International Monetary Fund (IMF) or World Bank, or
other countries.
Questions • Why do exchange rate crises occur? Rational or not?
• Why are these crises so economically and politically
costly?
• What steps might be taken to prevent crises, and at
what cost?
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Globalization of Finance: Debts and Deficits
Current Account --CA = EX – IM = Y – ( C + I + G)
• CA>0
– Exports > Imports
– Total income > total spending
– Net foreign wealth is increasing
• CA<0
– Exports < Imports
– Total income < total spending
– Net foreign wealth is decreasing
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Globalization of Finance: Debts and Deficits
Source: U.S. Department of Commerce, Bureau of Economic Analysis
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Globalization of Finance: Debts and Deficits
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Globalization of Finance: Debts and Deficits
Questions • How do different international economic transactions
contribute to current account imbalances?
• How are these imbalances financed? How long can they
persist?
• Why are some countries in surplus and others in deficit?
What role do current account imbalances perform in a
well-functioning economy?
• Why are these imbalances the focus of so much policy
debate?
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Current Account Deficit
• A country borrows from another to finance its
spending.
• CA deficit adds to a country’s debt.
• A debtor is not necessarily a bad thing. It depends
on how a nation spends its borrowed money: on
current consumption or on productive investment.
If it is the latter, then the nation’s future production
would increase and more than offset its debt. As a
result, the nation will enjoy an enhanced ability to
consume more goods and services in the future.
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Debtors and Creditors: External Wealth
• Total wealth or net worth = assets - liabilities
• A surplus (saving money by buying assets or paying down
debt ) helps increase net worth.
• Similarly, a deficit (taking on debt or running down savings)
contributes to a lower net wealth.
• From an international perspective, a country’s net worth is
called its external wealth and it equals the difference between
its foreign assets and its foreign liabilities.
• Positive external wealth makes a country a creditor nation;
negative external wealth makes it a debtor nation.
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U.S. Gross Foreign Assets and Liabilities,
1976 - 2009
Source: U.S. Department of Commerce, Bureau of Economic Analysis, June 2010
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Globalization of Finance: Debts and Deficits
Questions • What forms can a nation’s external wealth take and does
the composition of wealth matter?
• What explains the level of a nation’s external wealth and
how does it change over time?
• How important is the current account as a determinant of
external wealth? How does it relate to the country’s
present and future economic welfare?
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Government and Institutions: Policies and
Performance
• Government actions influence economic outcomes in
many ways by making decisions about exchange rates,
macroeconomic policies, debt repayment, and so on.
• To gain a deeper understanding of the global
macroeconomy, economists study policies, rules and
norms, or regimes in which policy choices are made.
• At the broadest level, research also focuses on
institutions, a term that refers to the overall legal,
political, cultural, and social structures that influence
economic and political actions.
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