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Summary International Economics and International Economic Organizations
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Summary of 112 pages for the course History Of International Relations at UA
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International Economics and Organizations1. INTRODUCTION
➢ Overview of the course:
o Introduction to basic concepts, theories, policies and institutions related to international
trade and finance
➢ Practical:
o 9 sessions of 3 hours
o Organized in introduction and two main parts
▪ International finance
▪ International trade
o Written exam
▪ 3 questions for each part
• Of which to select and answer 2
• 50%-50% division of marks
o Everything is in PPT
o Book by Gerber (2014 or 2018 edition)
▪ Copy in the library, the book itself is expensive
▪ Or an alternative in dutch: international economy – De Jonge
▪ But the focus is on the ppt
• = the exam material is on the ppt
1.1 International Economics: a “global public goods” approach
➢ A “global public goods” approach
o Basic: characteristics of a (pure) public good
▪ Non-exclusion
▪ Non-rivalry in consumption
▪ = a public good has two characteristics. The first one is non-exclusion. Once this
good is produced you can’t exclude people from using/consuming/enjoying the
good. The second one is non-rivalry in consumption. My consumption of the good
does not change the way someone else can or can’t use the good.
o In practice: a lot of quasi-public goods or joint products
▪ When this good is produced, the market can’t have a compensation for it
▪ Few goods are pure public goods → there are a lot of quasi public goods
• Comply with one of the two characteristics
• Joint products
o Goods that can be produced according to the market mechanism,
but it has some public characteristics
o There is public intervention needed to ensure that the goods are
produced
▪ Ex.: transport
o Basic problem: underprovision due to free riding
▪ Why would you pay for such a good if it is freely accessible?
o To overcome underprovision by rules, institutions
▪ The public sector must intervene
• Taxes to pay for the public goods
• It conditions to make supply interesting
o Private market goods
▪ If you want it you have to pay for it
• Goods provided by the market mechanism
• If you have it, there is less for others
1
,o Application to global context: global public goods (GPGs)
▪ Link to global public goods: applying the concept to an international level
• Desirable goods that should be produced in sufficient quantities but…:
o Underprovision due to the market mechanism
o Underprovision due to individual states
▪ Global public bads
• Ex.: pollution (>< GPG clean air)
o Problem that needs to be resolved, but needs global laws, rules,…
to fix it
o Has a transnational nature → these problems don’t stop at the
border
• Due to globalization
o = the intensification of cross-border transactions
o Things that were national are becoming
global/international/regional
o So you need international interventions
o And global institutions
o Different technologies of provision exist
▪ = the relationship between the individual efforts and the total supply of the Public
Goods
▪ E.g. summation, weakest link, best shot
▪ Three main technologies of provision:
• 1: Summation
o If you apply the concept of summation to the relation above
o The total is the sum of the individuals
▪ Ex.: pollution
o What you do matters
▪ Effect of the individual to the total
o Sum of the aggregate is the sum of what we do together as a
whole
o What is the policy message of pollution that the prof should say to
all of us? → everyone counts, everyone matters, what you do is
important and the more you do, the better the results
• 2: Weakest link
o The effect of everyone’s contributions on the aggregate is not the
sum of everyone together, but just of the person who does the
least, who has the smallest contribution
o Ex.: island surrounded by water
▪ Each one has a plot of land that borders the water, but no
fences (globalization)
▪ Fear of flooding → we build dams → some make the dam
higher than others
• Someone did not put as much effort into it as others
▪ The water starts rising → comes onto the land by the lowest
dam → will flood the whole island
▪ What is our collective level of protection against this flood?
The level of the weakest
o So: you have to target the weakest link → he matters the most
o Ex.: global public goods
▪ Creation of international financial stability (>< global public
crisis)
• Weakest link: one country in a global crisis creates a
large change of spill over to a global financial crisis
o Weakest link
• That weakest link will cause this crisis to spread
across the world
o SO: the IMF should target the weakest link
2
, • 3: Best shot
o The aggregate effect is determined by the one with the biggest/
strongest effort
o You should target your efforts to the one with the highest effort
o Ex.: finding new vaccines/drugs
▪ So it’s the most efficient to target resources to the one with
the best effort → focusing on one (or two) with the highest
chance
o Application to International Economics
▪ Rules on trade
▪ International financial stability, optimal capital provision
• See ex on global crisis by weakest link (above)
o Applications on institutions
▪ Because:
• Optimal capital provision
o You cannot rely on the private capital market mechanism to supply
these global public goods
o So you need institutions to solve this problem of exclusion for poor
countries in the global market
▪ International trade issues: the WTO
▪ International Finance: IMF/ World Bank
• Curing a market failure: financing and necessary development in the
countries that need this
o As a cure for exclusion
• World Bank: mission can be clearly translated in a global public good
context
1.2 The concept of Balance of Payments
➢ The concept of Balance of Payments:
o = BoP
▪ = an accounting record (in monetary terms) of all transactions of goods, services,
income and financial assets between domestic households, businesses and
government of a given country and residents of the rest of the world during a
specific period (usually 1 year)
o Cross-border transactions = everything that crosses the national border
▪ These are between domestic actors and the rest of the world
o The BoP is the key format/identity/tableau where you can see the amount and
magnitude of this cross-border trade and transactions
o BoP “identity”
▪ Current account + capital (and financial) account = 0
• So you have a current account balance and a capital account balance and
the sum of these is zero
• Current account openness: trade etc.
• Capital account openness: country engages themselves to be open for
cross border financial transactions → allowing for investment and loans,…
o The extent to which you allow yourself to trade with the rest of the
world to allow investments etc.
• But you also have the financial account
o So you have three parts
o All of the flows on the former capital account are now on this
account
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, ➢ (Im)Balances:
o Conceptually, a BoP must always balance (sum to zero): a total BoP surplus or deficit
cannot exist!
▪ Because of system of double entry-booking: one entry indicating the nature of
the transaction, other one indicating the foreign exchange consequence
• Forex inflow or outflow
▪ Otherwise you made an error
o General rule:
▪ Note to self: gaat over het geld en dus de dollars → import is – want het geld
gaat weg (nr. 1 en 11)
• Voor 11: om 11 te bekomen moet je alles wisselen van teken en optellen
• 11 moet het omgedraaide van 1 zijn
Everything leading to forex inflows is +, so forex inflow itself is –
Everything leading to forex outflows is -, so forex outflow itself is +
▪ SO:
• Credit (+) = exports, income and current transfers received, decrease of
foreign assets, increase of foreign liabilities
• Debit (-) = imports, income and current transfers paid, increase of
foreign assets, decrease of foreign liabilities
▪ Ex.: Tanzania exports coffee
• Incoming payment, coffee leaving to another country
• So:
o 1: goods are exported
o 2: dollars come in
▪ Transactions are always in dollars on the balance
▪ Is import leading to foreign exchange outflows? YES
• So import is put with a –
• And foreign exchange outflow is put with a +
• If you import goods, you need to pay for it, money is leaving the country
o Dollars leaving the country is a - → so import is a –
o But the foreign exchange outflow itself is +
o BUT each of the different BoP components individually can be unbalanced
(surpluses/deficits!)
o In reality, of course, errors are made: balancing item ‘errors and omissions” added to
BoP
▪ Registrations are done by different agencies
• Import and export is at customs
• Payments are registered by banks
▪ Extra element to the Balance of Payments: errors and omissions
• So the balance is balanced
▪ Ex.: you go to Tanzania with a suitcase filled with dollars
• Not registered
• But you are going to spend this money
• The money will be registered at the banking system of the country
• So: errors and not so official transactions
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