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Summary International economics
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International economics and international economic organizationINTERNATIONAL FINANCE AND THE ECONOMICS OF THE INTERNATIONAL MONETARY SYSTEM
INTRODUCTION
1. INTERNATIONAL ECONOMIC. A GLOBAL PUBLIC GOODS APPROACH
The basic characteristics of a pure public good are non-exclusion and non-rivalry in consumption.
- Market based hoods for example are excludable. You can only use the good when you are prepared to
pay for it. They are characterised by rivalry in consumption as well. If it is consumed by one person, no
one else can consume it.
- Public goods can be used even when someone does not pay for it. It is also not characterised by
rivalry. If one person consumes the good it does not effect the ability of others to consumer this good.
In practice a lot of quasi-public goods or joints product exists instead.
- Quasi-public goods have only one those characteristics.
- Joined products have some characteristics but not to a full extent.
The basic problem is the underprovision of public goods due to free-riding. To overcome this underprovision
rules and institutions are established. This is also the case for global public goods.
- Public goods are often very desirable to have a society but no one want to pay for them, this leads to
free-riding and underprovision of the goods.
- To overcome this there needs to be some kind of intervention from a public actor. In national context
this can be trough taxation for example to be able to produce the public good or maintain it. The
challenge is to take this national mechanisms to a global level. Globalisation has made some public
goods global.
There is also something like a public bad. The global public bad is looking at it from the public problem (global
warming) and the global good is achieving the desirable thing. Pollution has always been an international
thing, it does not stop at national borders. You now have new problems that have become global public goods
because of globalisation. These are things that to an extent were national but because of cross-border
transactions these now became global.
There are different types technologies of provision: You may have different ways in which the individual
contributions lead to the aggregate outcome. So what is the relationship and technology of production. How
do we come from individual contributions to the worldwide global aggregate production of the global good? It
is also determines what the best policy is
- First there is summation: this is the sum of all the individual contributions.
o Trying to reduce pollution: in pollution every effort matters, every action that reduces
pollution will have an effect on the aggregate supply. From a policy perspective this means
that we have to encourage all individuals to do an effort, policy-makers have to target
everyone.
- Second there is the weakest link: the lowest contribution determines the aggregate results. The total
result in the public good is determined by the lowest contribution
o Imagine we are on an island surrounded by see and we all have a plot of land on the island
with a coastal border. Because of globalisation we have no borders. We want to defend our
, self against the rising of the sea, and we are all building dikes to protect us from the flooding.
But if one person does not built a dike the island still gets flooded. We are only protected as
much as the lowest wall.
o This is the same for the protection against a fully financial crisis in a financially connected
global world. In the last global crisis was the US the weakest links, and because of the strong
links with other countries these countries were also hot by the financial crisis creating a
domino effect.
o Again the policy question are very different: it is not effective that systems that are already
well protected that they increase their contributions, that is a waste of resources. We only
have to focus on the weakest links to increase their protection.
- Third there is the Best shot: this is the opposite of weakest links. The level of aggregate of the public
good is determined by the highest contribution.
o The typical example is the production of vaccines. You are going to divide your resources to
the one that has the most chance to develop this vaccine, this is where the most fundings
will go to. The one that has the best problem to solving the problem.
o Again different policy interventions.
There is a lot of applications to international finance. For example, international financial stability as a global
public good, or a global financial crisis as a global public bad.
You don’t only need intervention at a national level but also at an international level.
In international economics there are rules on trade and there is international financial stability provided true
optimal capital provision.
- The international community designed the IMF to create global financial stability.
- The WTO is there to handle issues concerning international trade.
In the field of finance here is a second public good that has to do with optimal capital provision
- You have all the countries in the world, some more developed then others, some have more
resources then others. So it would be desirable that at the global level there is the possibility to
provide poor countries with access to financial resources to help them grow and develop. We are
making sure that countries that do not have sufficient resources have access to international
resources that help them develop.
- Private investors and banks are not willing to provide money to those countries due to the high risks
involved. We cannot rely on the market mechanism of private capital markets you need a global
public intervention mechanism. = public capital provision
o The world bank has as mission to provide money to those countries to solve this market
failure.
2. THE CONCEPT OF BALANCE OF PAYMENTS
The balance of payment is a key-concept because international economics is all about cross-border actions,
and you can observe them in the balance of payments. It is the key-reference to say something about the
intensity and composition of not only trade but finance, globalisation …
The balance of payment is an accounting record 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).
- BoP identity: current account + capital and financial account = 0
, o You used to have two basic parts
Current = incoming
Capital = outgoing
o There is a small complication: the IMF has introduced a third element in the balance of
payment. The current account remained the same but the capital account is split up in to
parts, one part is still called the capital account and the other part is now called the financial
account.
The foreign loans for example are now found in the financial account
People still use the term capital account openness but should actually refer to
financial account openness. The official publication and the discussion in the
literature is not aligned
IMBALANCES
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.
The total balance of payment should always be zero. It is the same as double entry accounting. Of course in
practice errors are made. It is a country with millions of transaction so at the end of the day you may see that
despite of the mechanics it might not be zero. In reality you will have some discrepancies.
- You add an item to the balance of payment: net errors and omissions, to make the sum 0
There are different agencies taking care of different transaction, there is also money that comes in without any
registration of the money entering the country, the magnitude of these errors does not say anything about the
mechanics it only says anything of the quality of the recording systems of the country and also about the level
of illegal transactions.
- If the error is high compared to the total level of the balance there is poor quality of the recording
system or a high amount of illegal transactions
General rule:
- everything leading to foreign exchange inflows is + , so foreign exchange inflow itself is –
- everything leading to foreign exchange outflows is -, so foreign exchange outflow itself is +
What do we mean by money coming in
- There is only a limited number of currencies used for this international currency: 90% is US dollar
o US dollar, Euro, Yen, Chinese currency
- This is because they are accepted as international means of payment
- For countries like Tanzania this is interesting because: if Tanzania exports it receive US dollar, which
can then be used to pay again for international transactions. Most developing countries cannot use
their domestic currency for US dollars. They first need to acquire US dollar by doing export
transactions, by receiving foreign loans, by receiving aid. To what extend have they historically built-
up foreign exchange, this is managed by the national bank.
o Most countries started with zero, you can only by imports to the extent that you have first
generated the foreign exchange currency and thus are very limited to the transactions you
can do.
, o It is important to realise that one booking is always reflecting the nature of the transaction
and the second booking will always be the foreign exchange consequence of that
transaction. Is foreign exchange coming or coming out.
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
the current account
- Number 1 (net export of goods and services)
o Export of goods and services = PLUS
o Import of goods and services = MIN
o if you import more than you export, you have a trade balance deficit which is indicated with
a MIN which also creates a loss of foreign exchange reserves and is indicated with a PLUS.
This is typical for developing countries, which means technically that they lose their
reserves which is a problem.
Number 2 and number 3 can balance this deficit
- Number 2 (net income received from abroad)
o Compensation of employees = salaries of people who work abroad
o Investment income: refers to interest payment on cross-border investments, for instance
when you receive a foreign loan you have to pay an interest
The interest itself is something that leads to foreign exchange outflow is MIN (See
number 11)
o The -100 means that they have paid more interests then received.
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