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Samenvatting international economics
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International economics1. A global public good’s approach
Characteristics of a (pure) public good:
- Non-exclusion
- Non-rivalry in consumption
Global public bad: for example pollution but to reduce pollution is for
example a global public good
Global public goods = Originates from the concept of public goods in an
international concept. What are public goods?
Definition saying a public good has 2 basic characteristics
- Non-exclusion. Once this good/service is produced, you cannot exclude
people from using it,consuming, enjoying the good. Once it is there you
cannot exclude people from the benefits.
- Non-rivalry in consumption. It is not because I use the good, someone else
can’t enjoy it. It does notreduce your ability to have access to the good.
For example street lights: nobody can be excluded from it and if I use street lights, another person
can also ‘use’ the streetlights.
Private goods, public goods versus market goods (= private produced goods by the market
mechanism). Provides a pricing mechanism for these goods. If you want to enjoy it, you
have to pay for it. If you pay for it and own it, it is no longer available for others to enjoy.
In practice: a lot of quasi-public goods, or ‘joint products’ or ‘club goods’ (meets only one of the two
characteristics of a public good)
Basic problem: under provision or production due to free-riding
Under provision due to free riding. Everyone wants them, but no one is prepared to pay for them.
The government can step in. The finance is from taxes. There is a mechanism where the
public sector intervenes. To guarantee this supply. You cannot rely on the market
mechanism for those things to automatically happen. A consequence of free-riding=under
production of this good because no private entity can force people to pay for it, so they will
not produce public goods ->, therefore, we need another institution to produce these goods
and that’s the government via rules etc (so we go from market mechanism to govern). To
overcome underprovision by ‘rules’, ‘institutions’ à You can try to overcome this under
provision due to rules, institutions (for example taxes)… to produce this public good
Joint products = goods or services that can be or are produced by the market mechanism
but they have some public characteristics. Public transport for example. It is not 100% one
of these two. Use this concept from a more general perspective – goods and services that
cannot be liable produced by the market mechanism.
à Link to global public goods
Application to the global context: global public goods (GPGs)
Maybe some of the public goods have not a national dimension, but an international or even global
dimension, so they should be looked at from the worldwide view. Fe: pollution does not stop at the
national border. It doesn’t mean we don’t need to intervene at national level, but we also need
international intervention.
We need international institutions in order to produce the global public goods, global institutions are
set up in order to produce these global public goods.
,Different technologies of provision exist: how do individual contributions translate in the total
production of the global good? There are different technologies to produce a particular global good.
3 important different kinds of technologies:
- Summation: the sum of all the individual contributions. So everyone has to contribute,
everyone is even valuable for the production. The total effort is the sum of the effort of each
individual. The sum of the aggregate is, is the sum of what we all together do collectively,
everyone matters. So if everyone does more effort, the total effort will also be bigger. Fe:
pollution. You have global public goods that are not produced by the simple summation
technology
- Weakest link: fe different regions of an island: each region needs to create protection on
their region against flooding but if one region does not create protection, the water will
come in via the ‘weakest region’ and the water will flood the whole island. The total
production equals the production of the one with the weakest contribution. So the sum of
the aggregate = the person who does the least, weakest contribution. Policy consequence:
It’s a waste of resources to say that all the regions need to make their protection higher if
that one region is not protecting at all, so you should target the weakest link. Suppose you
want to protect the world against a financial crisis: you have to make sure that every national
financial system is stable, safe, and monitored well. Because if one national financial system
is not stable, it will spill over to others and a financial crisis is started. A financial crisis will
start in the weakest link (in 2008 it was the US) therefore policy consequences need to target
the US
- Best shot: the aggregate production/supply is provided solely by the one with the highest
contribution. Fe: vaccins -> most effective to target (=give our contributions to) the best
shot: the one that has proven to have the biggest capacity, resources, the highest probability
to produce desirable and effective vaccins. We don’t have time to spread our resources it
will not be efficient, but rather we will pay the one country with the best shot to produce this
global good.
Application to international economics:
- Rules on trade: of goods but also people: Some of global public goods have always been
global fe global warming. But some of global publ goods were first national but became
global due to the globalization, no borders... fe: spread of deceases (if no one would travel,
viruses would not spread)
- International financial stability, optimal capital provision:
• International financial stability: the global public bad we try to prevent= a global
financial/economic crisis. Watch out for the weakest links, there will be the highest
probability that a financial crisis will start here. The IMF should target the weakest
link. In 2008 it started in the US so that was the weakest link.
• Optimal capital provision= Global public goods that cannot be produced by the
market mechanism, where markets are not working. Here, if these goods would be
produced by a market mechanism -> poor/developing countries would be excluded
from the capital market because they have no resources to contribute to the
production, so for some goods, we cannot rely on private capital markets. We need
an intervention that solves this problem of exclusion.
Applications on institutions:
- International trade issues: the WTO
- International finance: IMF/world bank
à global institutions where the mandate, objective can be clearly translated in a public good.
2. The concept of the balance of payments
,Balance of payments (BoP)
An accounting record (in monetary terms) of all transactions of goods, services, income and financial
assets (bezit+middelen) 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)
è All cross borders transaction between the residents of a particular country and the residents
of rest of the world for example the balance of payments of Tanzania= all the cross border
transactions between Tanzania and the rest of the world
è All domestic internal transactions are not looked at, is not in the balance of payment
è
BoP identity= current account + capital (and financial) account = 0
Current account= International trade transactions: current account openness, the country is open to
the rest of the world.
Capital account= financial transactions
à the one account there can be a positive trend (surplus) or negative trend (deficit) but the sum of
those together is always 0
à 2 options: Bop=current + capital account or: BoP= current+capital+financial
Financial account= the most important one
Capital account openness, the country is open for transnational transactions.
Referring to the idea of acountry allowing this kind of transaction. Allow,
engage with the rest of the world for cross border transactions. Strictly
speaking this is found on the financial account of the Balance of Payment.
What used to be the capital account is now split up in the capital account
and the financial account. What used to be 2 parts are now 3.
Capital openness refers to transactions that you now find in the financial account of the balance of
payment. Some countries (developing countries) can use the ‘old presentation’ and use only the
capital acc, while other countries use the ‘new presentation’ (=financial acc)
3. Imbalances
Conceptually, a BoP must always balance (sum to zero); a total BoP surplus or deficit cannot exist! à
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)
For example Tanzania exports goods to the rest of the world. What can happen with an export
transaction? First, goods leaving the country and in return for those goods, money comes in. each of
them is booked, has an entry in the balance of payment (they have the same number in this balance
of paym). What kind of money is coming in in the country? -> not in local currency but in dollars or
other currencies that are internationally recognized as international meanings -> very restricted
number of currencies. The money coming in in Tanzania is in dollars which is very important because
dollars creates the possibility for Tanzania to pay for import transactions (T can only import, pay for
goods in dollars, that’s why it export goods in return for dollars). For a developing country, their
currency is worth nothing on the international market.
General rule: how you register what
- everything leading to forex inflows is + , so forex inflow itself is -
- everything leading to forex outflows is -, so forex outflow itself is +
- When a country experiences a large inflow of foreign currency, the central bank will buy the
foreign currency and issue local currency to the public. As a result, the international
reserves accumulate and people have more money in hand.
- Exchange inflow is defined as an amount of coin deposited into the exchange wallets and
exchange outflow is defined as an amount of coin withdrawal from the exchange wallets.
, + 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
BUT each of the different BoP components individually can be unbalanced (surpluses/deficits)
In reality, of course, errors are made: balancing item ‘errors and omissions’ added to BOP
Accounting rules – important to realise that a balance of payment is always balanced,
always sums to zero. Conceptually because you use double entry booking. The essential
thing is that for each cross-border transaction, you have two entries to separate
bookings in the balance of payment. A credit and a debit one with the same amount but
an opposite sign. If you sum them it becomes zero by concept.
The two entries:
- What is the nature of the transaction? -> import or export
- The financial payment that bows with the transaction which is in foreign exchange=
not in the currency of that country but in a currency that’s internationally
recognized. All cross borders transactions are in dollars.
Export transaction
Everything leading to foreign exchange inflows is a + and so the foreign exchange inflows itself is a
minus. The export transaction is put in the balance of payment with a +.
Import transaction
Everything leading to foreign exchange outflows is a – and so the foreign exchange outflows itself is a
+. Imports are goods coming in and you pay for an exchange. Import is leading to foreign exchange
outflows. Dollars leaving the country is a minus.
Export: een land verkoopt een goed en krijgt er geld voor in de plaats (is positief), maar voor de
centrale bank is dat negatief want dollars verlaten de centrale bank
Import: een land koopt iets aan (moet geld afstaan) wat negatief is, maar voor de centrale bank is
dat positief, want er komen dollars binnen
Foreign exchange outflow= buitenlandse valuta uitstroom (geld verlaat een land) = positief want
valuta komt binnen in de CB
Foreign exchange inflow= buitenlandse valuta instroom (er komt geld binnen in een ander land) =
negatief want valuta verlaat de CB
Financial, foreign asset: when I have given a loan to a resident of the rest of the world -> you own
something
Financial liability: when I one a resident of the rest of the world something -> you owe smt
There can be errors or non-official transactions. The bigger these errors are in total, it say smt on the
quality of the system, but maybe also smt about the degree of informal transactions taking place.
Omissions: payments but not at the bank level; this refers to illegal transactions where people
enter/leave the country with a suitcase of money -> the transaction is not registered but the money
enters in the economy of that country. Omissions can be done on purpose.
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