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Summary GPE readings week 4-6
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GPE readings week 4-6
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GPE readings week 4-6Week 4 - Chapter 14
International finance – the exchange of assets between the countries
of the world economy.
- Basic principle: “things add up”
Open-economy accounts – viewing an economy as being aggregated
into 1 giant sector.
- the capital account (the bank) invests in
firms, while receiving Household Savings,
Government Savings (domestic savings) and
foreign savings.
Domestic investment = Domestic Savings
+ Foreign Savings
- Any gap between domestic investment and
domestic savings is made up for by an
inflow of foreign savings.
Fundamental accounting Equation for
open economies:
- I = domestic investment.
Balance of
payments
- The balance of
payments
accounts of any country focus exclusively on the relationship of the
country with the rest of the world
- Current account: records transactions that create earnings and
generate expenditures between the domestic country and the rest of
the world, without involving the exchange of assets.
, - Capital/financial account: records transactions between the
domestic country and the rest of the world, that do involve the
exchange of assets.
Current account + Capital/financial account + Official reserve transactions
(+ Errors and omissions) = 0
Current account + Capital/financial account = Change in official reserves
diagnostic tool
Global imbalances
- Intuition suggests that high-income countries will be sources of
capital and LMICs will be capital destinations. But simple analysis
of the US and Chinese balance of payments accounts shows that this
has definitely not been the case.
o There have been large global imbalances in savings and
investment flows.
o The financial globalization made it more likely that expanded
asset transactions could take place between countries, leading to
global imbalances
Week 4 – chapter 15
Capital flows
1. Foreign direct investment (FDI): the acquisition of shares by a firm
in a foreign-based enterprise that exceeds a threshold of 10%, which
implies managerial influence and participation in the foreign
enterprise.
2. Equity Portfolio investment: the acquisition of shares by a firm
below 10%, without managerial influence indirect investment.
3. Bond finance: firms (private debt) or the government (public debt) in
a country, issue bonds to foreign investors. These bonds can be
issued in either the domestic currency or in foreign currencies and can
involve different kinds of default risks –depends on portfolio
a. Tradable asset
4. Commercial bank lending: These loans can be short-term or long-
term, can be made with fixed or flexible interest rates, and can take
the form of interbank loans.
a. Usually not a tradable asset.
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