Samenvatting
Summary International Economics and International Economic Organizations
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Voorbeeld 4 van de 73 pagina's
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Les 1: Introduction to concept of Global Public Goods, and the Balance of Payments (BOP)International Economics: a ‘global public goods‘ approach
Basic characteristics of a (pure) public good:
o Example: clean air, street lightning
o Non-exclusion: once the good is produced, you can not be excluded from benefiting the good or
service even when you’re not willing to pay for it
o Non-rivalry in consumption: even when I consume the good, that does not influence you are ability
to also consume the good
<-> private/market goods: goods produced by the market
Exclusion is possible (you are only allowed to consume the good if you are prepared
to pay for it) but some private goods are also non-excludability => makes it’s difficult
to rely on the market mechanism to make sure that these desirable goods or
services are produced => the market mechanism produced these goods but they will
not get compensated for it, consumers can not be forced to pay for it through the
market mechanism
Rivalry: I buy the thing; I consume it and it’s gone
In practice: a lot of quasi-public goods, or ‘joint products’
o Quasi goods are goods that have one of the two characteristics but not the other one (example:
NATO: were a countries have a common defense, its easy to exclude counties because you have to
become a member but once you are a member these desirable good of being defended has non-
rivalry => not because 1 country uses the benefits, other counties can’t )
o Joint products: things that have a little bit of the private but also a little bit of the public (example
education)
Basic problem: underprovision due to free riding
o You cannot rely on the market mechanism => the market mechanism can only be used to make sure
that we have a supply of these goods in an efficient way => because of free riding
o If there is non-excludability, you can not be forced to pay for things even if you’re enjoying it => you
can play ‘free-rider’
o If you can play ‘free-rider’: market actors will not be interested in providing these goods because
they can not force you to pay for it => if you would only rely on the market mechanism, a number of
desirable goods and services will not be produced or under prevised => you need other actors to
step in to provide this desirable goods and services
To overcome underprovision by ‘rules’, ‘institutions’
o Direct way: At least the public sector (government) steps in => in order to make sure that these
desirable goods and services are provided in sufficient quantities to cure this under supple
Governments have their ways to force people to tribute to the financing of that good and
service => fonds by taxation
Government to solve the market failure (= underprovision of a good or service)
o Indirect way: The government can step in itself but it can also be through trying to influence private
sector behavior to particular actions so that the private sector is more inclined to provide the good
or service
Application to global context: global public goods (GPGs)
o Some market failures can not only be cured at the national level because a number of these market
failures have cruse boarder dimensions (example: clean air, etc.)
o There is a potential of free-riding, not by individuals but by states => solving these problems at a
supra-national level with agreements between states
o You need international institutions, who’s mandate it is to provide this desirable goods and services,
you also need funding so that these institutions also have the means to fulfill there mandate, to
supple this good in sufficient quantities
Global public bad are global public goods that are problematized (like climate change is a
global public bad)
, Different technologies of provision exist (e.g. summation, weakest link, best shot)
o Technologies of production is the way how all individual contributions translate to the global/total
supply => how do we come from individual contributions (example: me and you introducing
pollution) to the total effect/supply
There are different technologies of production
Summation: the total supply is the sum of all the individual contributions =>
pollution is a global public good that is produced by summation => your effort in
reducing pollution matters as much as what somebody else does and the total effect
is the sum of all are individual efforts
Everyone must contribute because everyone’s contribution counts
Weakest link: total effect is determent by the contribution of the weakest (= the
once who are contributing the least) => all the others have no effect on the total
effect
Example: we live on an island surrounded by the sea. Each of us has a small
part of land that borders to the sea but there are no fences between the
plots of land, the only danger is flooding so you build dikes (some will build
high once other will build low once) => the lowest dam will weaken the
island during flooding because even when you have high dam
Global financial stability meaning the protection against a global financial
crisis has a lot of features of this weakest link => the protection of the world
against a global financial crisis is the level of protection od the weakest link
at national level => crisis will spill over to other counties and will become a
global financial crisis
Best short: the total effort will be determent by the once how are making the
biggest effort
Example: the development of new drugs (vaccines) => a lot of people are
trying to make a vaccine, but some are much better and have much better
changes of successfully making a vaccine than others
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 between domestic households, businesses and government of a given country
and residents of the rest of the world during a specific period (usually period of 1 year)
o Between residents of one country and the rest of the world
BOP is constructed on a number of big parts and traditionally we have two big parts called
the current account and the capital account => together they make up the balance of
payment which means the sum to zero
BoP ‘identity’:
o current account + capital (and financial) account = 0 => it’s always balanced
There may be imbalance in subparts of the balance of payments, but the Bop is ALWAYS 0
Now you have 3 parts => they made the capital account split in 2 parts: 1 capital account and
1 financial account
(im)balance
o 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)
For every cross-border transaction (example: export transaction) that is registered at
the balance of payment you have 2 entries with the same amount but with a
different sign (+ and -) so the sum is always 0 (subparts are not always 0)
, o General rule for the BOP:
everything leading to forex inflows is +, so forex inflow itself is –
Foreign exchange = currencies that can be used widely across the world, currencies
that are used internationally to pay for things => very limited like the dollar, euro (=
purchasing power)
Incoming payments from for instance export transaction are coming in in dollars
(mostly) => it’s money that can be used by countries to pay for things on the world
market (you cannot use your local currency) it’s crucial for counties to urn foreign
exchange by export
Some countries have no currency with purchasing power on the international field
so they first have to urn foreign exchange by doing international transitions for they
can use this to buy things on the market => they are restricted by the amount of
foreign exchange generated (= foreign exchange reserves of a country)
Foreign exchange reserves of a country = the sum of currencies that are
usable on the global market (like gold)
everything leading to forex outflows is -, so forex outflow itself is +
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
o 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
Example Balance of payment
Current account -> containing international trade transactions (import/export)
1. Net export of goods and services (Trade -300 -> export: +500 because you have foreign exchange
balance: export of 500 and import of 800) (500- inflows
800) -> import: -800 because your foreign exchange is
outflowing
2. Net income received from abroad - 100 Foreign loan:
-> compensation of employees = the -> interest payment = outgoing payment (-)
remuneration that you get or you pay as a -> - 100 = we do more payments abroad than we
country for others or for you, using factors of receive from abroad, so you are decreasing reserves
production from abroad (capital, labor) =>
payment that is linked to a contract of
services providing factors of production that (if it’s + here, it’s – with)
have a cross boarder nature (salaries)
-> investment income => you get loans or
give loans, you have to give them back +
interests
3. Net current transfers (also in foreign 150 = cross boarder transparent payment that is not linked
currency) to any contractual factor of production relations
-> official development aid: (not in the form
of a loan) => (private) actors that gave a aid to 150: foreign exchange inflow => on a net basis foreign
a country exchange is coming
-> workers remittances: people living here
sending money back to there home country
family
4. Current balance ( = nr 1 + 2 + 3) - 250 = the trade balance is a deficit here
- 250: we are still depleting reserves => the country is
losing reserves, can be a indication of a problem but
not necessarily
, Capital account
5. Net capital transfers 50 = transfers that relate to transactions that have a kind
-> Debt forgiveness: if a country reserved a of multi period dimension
loan, normally you have to pat it back but if -> typically involves more than 1 year => typically a
the country runts into payment problems and long-term loan that you had to repay over a number of
the creditor (the one who owns the loan) years => mostly not for advanced countries
decides to grant dect forgiveness for that loan
6. acquisition/disposal of non-produced, non- 30 = non-Produced/ non- financial assets with a multi
Financial assets period annual dimension
-> Patents
-> Leases If you use the patents/leases, you have to pay annual
fees for those patents/leases => more for advanced
countries
7. Capital account balance (= nr 5 + 6) 80
Financial account (8, 9 and 10 are the 3 basis types of cross border transactions)
8. Net direct investment 80 Foreign direct investments = a foreign person (firm)
(You can buy existing shares or create a new that is investing in a firm in another country by buying,
company) => foreign investor has control over creating shares => equity investments: the shares of a
the company (you need 10% of the shares) firm (if you own shares, you own a part of the
company)
+: foreign exchange inflow (investments come
in) Direct = you need sufficient shares to be able to exert
-: foreign exchange outflow (investments in control over the company
other country)
9. Net portfolio investment 70 Can be 2 things:
-> it can be the same as 8 meaning a foreign investor
Loan <-> bon: only different is that there is a buying shares of a company in another country =>
secondary market for bons (you can buy and buying shares because the foreign company thinks it’s a
sell bons at every moment at time) => good investment, not interested in taking over the
Securities = financial instruments for which company (<-> 8)
there is a secondary market -> a dept type of instrument that is called bons or bills:
the original owner of the bon is not forced to keep it for
+: Foreigner buys bons (debt of this country) the whole period of the loan
=> foreign exchange comes in
-: country buying debt of another country
10. Net other investment 100 Can be 2 things:
-> Loans for which there is no secondary market
+: foreign exchange inflow (investments -> Deposits: foreign investoropening a bank account in
depositing money in this country) this country and depositing money on a deposit
-: foreign exchange outflow (investments account
depositing in other country)
11. Change in foreign reserve assets - 70 -> Export: - 500 because foreign exchange coming in =>
this is an increase of foreign exchange reserves
-70 = net result of all the transactions for this -> import: + 800 because foreign exchange going out
year (1 till 10) => - 70 so our foreign exchange -> interest of loan of 2: + 100 because it is a outflow
reserves have gone up (+ = down) -> foreign exchange of 3: - 150
-> net direct investment (8): - 80 because you have
more foreign exchange
-> net portfolio (9): - 70
-> net other investment (10): -100
12. Financial account balance (= nr8+9+10+11) 180
Net error and omissions (= 4 – 7 -12) -10 Some where we made a mistake => here and there you
have mistakes or things that are not captured
Problematic is when a country has more outflows than inflows especially if you didn’t accumulated over time an
amount of foreign exchange reserves that you can now use in order to fill the gap. 11 is the most important => - 70
indicates a decrease of foreign exchange; when 11 is + we have a problem
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