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Summary International Economics (MAN-BCU2021) book & lectures
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Summary of the book for International economics, which also includes notes from the lectures.
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International economics Book SummaryChapter 1; Introduction
International economics; issues raised by the problems of economic interaction between sovereign states.
• The gains from trade; when countries sell goods and services to each other, this exchange is almost
always to their mutual benefit.
• The patterns of trade; who sells what to whom
• Protectionism; protect form too much trade or free international trade
• The balance of payments; a trade surplus or deficit should be placed in the right economic context
of the country to really understand what it means.
• Exchange rate determination
• International policy coordination; differences in goals among countries lead to conflicts of interest.
• International capital market
Chapter 13; National income accounting and the Balance of Payments
Microeconomics studies the use of the world’s scarce productive resources at a single point in time from
the perspective of individual firms and consumers. Macroeconomics studies how economies’ overall levels
of employment, production and growth are determined. It analyses the behavior of an economy as a whole
by looking at;
- Unemployment
- Saving; a country’s saving or borrowing behavior affects domestic employment and future levels of
national wealth.
- Trade imbalances; they redistribute wealth among countries and affect the effect of policies
- Money and the price level; we need stability in money price levels
National income accounting; records all the expenditures that contribute to a country’s income & output.
National income accounts; Gross national product (GNP)
• It is the value of all final goods and services produced by the country’s factors of production and
sold on the market in a given time period.
• It is calculated by adding up the market value of all four expenditures on final output;
- consumption (the amount consumed by private domestic residents),
- investment (the amount put aside by private firms to build new plant and equipment)
- government purchases (the amount used by the government),
- current account balance (the amount of net exports of goods and services to foreigners)
! we need to divide GNP into four expenditures, because we cannot hope to understand the cause of a
particular recession or boom without knowing how the main categories of spending have changed.
GNP must equal its national income; the income earned in that period by its factors of production.
! sales of intermediate goods are NOT counted as well as used products. Only produced products count.
! GNP does not take into account the economic loss due to the tendency of machinery (depreciation). GNP
less depreciation is called net national product (NNP).
! unilateral transfers (gifts from residents of foreign countries) must be added to NNP to calculate national
income, because they are part of the country’s income, but not part of its product.
! National income = GNP – depreciation + unilateral transfers, but this book uses National income = GNP
Gross domestic product (GDP); measures the volume of production within a country’s borders.
! GNP equals GDP plus net receipts of factor income from the rest of the world.
! GDP does not correct, as GNP does, for the portion of countries’ production carried out using services
provided by foreign-owned capital and labor.
, In an open economy, savings and investments are not necessarily equal, as they are in a closed economy.
This occurs because countries can save in the form of foreign wealth by exporting more than they import
and they can dissave (reduce foreign wealth) by exporting less than they import.
- Consumption; the portion of GNP purchased by households to fulfil their current wants.
- Investment; the part of output used by private firms to produce future output
- Government purchases; any goods and services purchased by federal, state or local government.
The national income identity in a closed economy Y (GNP) = C + I + G
! if consumption goods are not sold immediately to consumers or the government, firms add the mto
existing inventories, thereby increasing their investment
The national income identity in an open economy Y (GNP) = C + I + G + EX – IM
= domestic spending +- foreign expenditures
Current account balance; the difference between exports and the imports of goods and services.
- CA = EX – IM
! when imports > exports, there is a current account deficit
! when exports > imports, there is a current account surplus
Since a country as a whole can import more than it exports only if it can borrow the difference from
foreigners, a country with a current account deficit must be increasing its net foreign debts by the amount
of the deficit. A country with a current account surplus is earning more from its exports than it spends on
its imports. This country finances the current account deficit of its trading partners by lending to them.
A country’s current account balance equals the change in its net foreign wealth.
Y = C + I + G + EX – IM
Y – (C + I + G) = EX – IM
Y – (C + I + G) = CA
Net international investment position (IPP); the difference between its claims on foreigners and its
liabilities on them. It is a measure of the nation’s stock of net foreign wealth.
National saving; the portion of output (Y) that is not devoted to household consumption (C) or
government purchases (G).
! in a closed economy, national savings are always equal to investment. This tells us that the closed
economy can only increase its wealth by accumulating new capital.
|→ S = Y – C – G
S = (C + I + G) – C – G
S=I
! in an open economy, savings and investment can differ. This tells us that an open economy can save by
either building up its capital stock or by acquiring foreign wealth (EX – IM)
|→ S = Y – C – G
S = (C + I + G) + EX – IM
S = I + CA
Private savings (Sp) is the part of disposable income (Y – T ) that is saved rather than consumed.
|→ Sp = Y – T- C
Government savings (Sg) is the part of disposable income that is saved rather than consumed.
|→ Sg = T – G (because the income is Taxed T, spendings is G)
National savings S = Y – C – G
S = (Y – T – C) + (T – G) = Sp + Sg
Sp + Sg = I + CA
Sp = I + CA – Sg = I + CA – (T – G) = I + CA + (G – T)
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