International Economics; Summary of all lectures and relevant information from the textbook.
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Grade: 8.5
* GDP: Gross domestic product = Final value of all goods and services produced within a country
* GNP: Gross national product = Value of all goods and services BY a nation’s factor of
production in a given time period
* GDP = GNP - Payments for home factors of production, produced abroad + payments for
foreign factors of production produced at home
National Income:
* Y = C + I + G + CA
* C is consumption, I is investment, G is government spending, CA is Export minus Imports =X-M
* CA is the Current Account (Export — Import)
* Final products not purchased by household, etc. are counted as investments…
* Equilibrium in demand driven model: Supply = Demand —> Y = AD = C+I+G+CA
Alternative representation of national income identity:
* National Income + Imports = Expenditures at home + abroad
* Y + IM = C+I+G+EX
Balance of Trade:
* EX-IM = Net expenditure by foreign individuals and institutions
* CA = EX - IM = Y - (C+I+G)
* If productions is higher than domestic expenditure, this means Exports > Imports
* More exports than imports:
* More income from export than it spends on imports
* Net foreign assets increase (CA Surplus ‘produces’ net foreign wealth (investment))
* When Exports < Imports, Net foreign assets decrease (disinvestment)
Savings and the Current Account:
* S = Y - C - G (income which is not consumed) = I (S = Sg + Sp) (government and private)
* CA = EX - IM = Y - C - G - I = S - I
* This implies: Current Account = National Savings - Investment
* This implies: Current Account = Change in Net Foreign Assets = Net Foreign Investment
* Current Account de cit means a Negative Net Foreign Investment (more out than in)
* CA = S - I = Sp + Sg - I = Sp + ( T - G ) - I = CA (Government de cit higher? Higher CA de cit)
Balance of Payments:
* Flow of all payments between home country and foreign country which includes MONEY
* Usually this Balance of Payments is balanced, but there are some errors (ERR)
* BoP = CA + KA + FA = Current Account + Capital Account + Financial Account
* Each transactions enters as a credit and as a debit
* BoP de cit ===> De cit o cial settlements balance = Losing International Reserves!
Balance of Payments Account:
* For payments to and receipts from foreigners during a certain period
* Involves two parties and enters as a debit and credit
* Double Entry means: Current Account + Capital Account + Financial Account = 0
Current Account (CA):
* Merchandise, Services, Factor Income, Unilateral Transfers
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, Capital Account (KA):
* Special transfer of assets, minor account for most countries
Financial Account (FA):
* Accounts for ows of nancial assets
* = Di erence between sales of domestic assets to foreigners and purchase of foreign asset by us
* Every export (credit) leads to money in ows (debit)
* Every import (debit) leads to money out ows (credit)
Financial Out ows:
* Portfolio investments in shares/bonds — returns
* FDI — Create or expand the market, new production plant for example
Financial Account: Three parts
* O cial Reserves Assets (FA reserve)
* All other assets (FA Non-reserve)
* Statistical discrepancy (ERR)
O cial International Reserves: FA Reserve
* Foreign assets held by Central Bank to cushion against instability (and exchange rates changes)
* Include government bonds, currencies, gold, account at IMF
Foreign Exchange Intervention:
* FED sells Yen ; Credit this item ; Debit $ in ow ; This means depletion of (International) reserves
Balance of Payments (BoP):
* Level of Central Bank nancial ows is called —> ‘’O cial Settlements Balance’’ (=BoP)
* This is equal to: CA, the Non-reserve portion of FA and the statistical discrepancy (ERR)
* BoP = CA + FA (Non-Reserve) + ERR
* BoP = FA (Reserve) —> CA + FA (Non-reserve) + ERR + FA (Reserve) = 0
* This implies: BoP de cit = FA (reserve) surplus —> Reserve increases; more dollars in than out
* This implies: Depleting its o cial international reserve + Strengthen home currency +
Possible large debts against other Central Banks …
O cial Settlements Balance (or BoP):
* Should be 0 under oating exchange rates — Central Bank does not intervene (no changes res.)
Balance of Payments:
* Flow of all transaction between Home and RoW, which includes Money
* CA + FA = ERR —> ERR should be 0, so BoP is balanced…
* BoP De cit = De cit O cial Settlements = FA (Reserve) Surplus = Losing International
Reserves
* Imports > Exports = CA De cit
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