schedule
Friday, Old April 1: Quiz 7
New Schedule
Friday, April 1: Lecture on Financial Crises
Monday, April 4: Quiz 7
FINAL EXAM:
Monday, May 2 @ 11:30-2:20
-not much cumulativewill mostly cover materials after Quiz 8
-studyguide will be provided
-worth two quizzes
Introduction to International Finance:
The Big Picture
The Big Four:
Internal Balance
Economic Growth
Unemployment
Inflation
Balance of Payments (BOP)
External Balance
ECONOMIC GROWTH
INFLATION
UNEMPLOYMENT
Internal Balance
BALANCE OF PAYMENTS
External Balance
OPEN ECONOMIES
Conduct international trade
Conduct international finance (borrow & lend money)
Therefore they have:
Current accounts (CA = exports imports)
Capital accounts ( KAP = -CA)
BALANCE OF PAYMENTS KEEPS TRACK OF THESE
OPEN ECONOMIES
Current Account (CA)
= (exports) (imports)
= Net Exports (NX)
= Trade balance
Capital Account (KA)
= (purchase of foreign assets by domestic residents)
(purchase of domestic assets by foreigners)
= Net Capital Outflows (NCO)
CA = -(KA)
or
NX = NCO
ECONOMIC GROWTH
INFLATION
Internal Balance
UNEMPLOYMENT
EXCHANGE RATE
BALANCE OF PAYMENTS
External Balance
Exchange Rate
Internal Balance
External Balance
Economic Growth
Y = Output = Income
Long-Run or Fundamental
Determinants Economic Growth
Y = A*f(L, K, H, N)
A = technological progress
L = labor
K =capital (tools)
H = skills (education)
N = natural resources
Long-Run or Fundamental
Determinants Economic Growth
Y = A*f(L, K, H, N)
Y = A*f(1, K, N, H)
L
L LL
Per capita economic growth!
GDP/Capita in 1900 (US = 100)
100
100
95
93
80
60
50
50
40
33
33
25
20
M
ex
ic
o
Ja
pa
n
le
Ch
i
a
A
rg
en
tin
an
y
er
m
G
Fr
an
ce
Au
st
ra
lia
U
K
U
S
0
25
Life in America, 1900
New York City, 1900
Georgia Drug Store, 1900
Georgia Train Station, 1900
Georgia Farm, 1900
Georgia Tech Classroom, 1900
Georgia Tech Presidents Office, 1900
Georgia Tech Library, 1900
Life for Average American, 1900
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
GDP (constant $US 2000)
3E+12
2.5E+1
2
2E+12
1.5E+1
2
1E+12
5E+11
0
China
Switzerland
South Korea
GDP per capita (constant $US 2000)
$45,000
$40,000
$35,000
$30,000
$25,000
China
Switzerland
South Korea
$20,000
$15,000
$10,000
$5,000
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
$0
GDP per Capita
$40,000
$35,000
$30,000
World
East Asia
Latin America
Euro
USA
Sub-Saharan
Japan
$25,000
$20,000
$15,000
$10,000
$5,000
$0
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
% of World GDP
100%
80%
ROW
Sub-Saharan
Japan
Euro
Latin America
East Asia (ex-Japn)
USA
60%
40%
20%
0%
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
% of World GDP (Top 19)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
19
60
19
63
19
66
19
69
19
72
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
20
02
20
05
0%
Switzerland
Sweden
Argentina
Russian Federation
Netherlands
Australia
Mexico
Korea, Rep.
India
Brazil
Spain
Canada
Italy
France
United Kingdom
China
Germany
Japan
United States
Measuring Economic Growth
How to Measure Economic Growth?
Y = Output = Income
Y= GDP = Gross Domestic Product
= market value of all final goods & services produced within our country
Y = GNP = Gross National Product
= produced by Americans regardless of location
Output = GDP = Income
sum of all income to owners of
economic factors (land, labor, capital)
= rents, wages, profits, interest
How to Measure Economic Growth?
Output = GDP = Income
sum of all buyers of US output
GDP = Y = C + I + G + NX
C = Consumption (good/services purchased by individuals & households)
I = Investment (goods/services purchased by business)
G = Government (goods/services purchased by any level of government)
NX = Net exports (Exports Imports) (net goods/services purchased by foreigners)
How can US reduce its trade deficit?
Closed Economy (Long-Run)
Y=C+I+G
Y-C-G=I
taxes
(Y-T-C) + (T-G)
Private savings +
= Y - C - G= I
Public savings
= Investment
S=I
Open Economy (Long-Run)
Y = C + I + G + NX
NX =
Y
(C+I+G)
= output domestic spending
Closed Economy (Long-Run)
Y=C+I+G
Y-C-G=I
taxes
(Y-T-C) + (T-G)
Private savings +
= Y - C - G= I
Public savings
= Investment
S=I
Open Economy (Long-Run)
Y = C + I + G + NX
NX =
Y C G = NX + I
Savings = NX + I
SI
= NX
Y
(C+I+G)
LONG-RUN, OPEN ECONOMY
SI
= NX
THEREFORE:
if S > I, then we lend the excess out (NX= +)
if S< I, then we need to borrow (NX= -)
Trade policy doesnt affect any of this
to increase exports you must increase savings!!!
LONG-RUN, OPEN ECONOMY
SI
= NX
SI
= NX = NCO
Net Cash($) Outflows
to foreign countries
THEREFORE:
if S > I, then we lend the excess out (NX=NCO=+)
if S< I, then we need to borrow (NX=NCO= -)
Example: Bill Gates sells a copy of Vista to Sony for 10,000
(Microsoft has exported software to Japan)
1) Gates puts the 10,000 in his pocketand forgets about it
then NX goes up; NCO goes up
2) Gates uses the 10,000 to buy Japanese stocks and bonds
then NX goes up; NCO goes up
What China and oil-exporters
do with all the $US they earn
3) Gates uses the 10,000 to buy a new Gameboy
then NX is net 0; NCO is net 0
4) Gates exchanges the 10,000 at a bank for $US
hes just passed the problem to the bank, which then does 1, 2, or 3
US Current Account
1E+11
0
1960
-1E+11
-2E+11
-3E+11
-4E+11
-5E+11
-6E+11
-7E+11
-8E+11
-9E+11
1965
1970
1975
1980
1985
1990
1995
2000
2005
Whats Point?
1) the If we Americans want to cut our trade & budget deficits, then
we need to Consume and Govt spend less and SAVE more.
2) Trade policy wont affect our deficits
but it will shrink the economy at the expense of consumers
How Does US GDP look?
GDP = Y = C + I + G + NX
US GDP, 2009 ($, Billions)
$12,000
$10,000
$10,001
$8,000
$6,000
$4,000
$2,915
$1,589
$2,000
-$386
$0
Consumption
71%
Investment
11%
Government
21%
Net exports
-3%*
-$2,000
* Exports Imports = -$386 billion (-3% of GDP)
Exports + Imports = $3,543 billion (25% of GDP)
Source: Bureau of Economic Analysis, National Economic Accounts www.bea.gov
Trade as % of GDP (2008-2009)
500%
423% 414%
400%
300%
200%
145%
100%
61%
55%
55%
50%
47%
45%
41%
34%
26%
25%
Source: World Bank Development Indicators, 2010
US
Br
az
il
Ja
pa
n
Au
str
ali
a
ina
Ar
ge
nt
Ch
ina
Ru
ss
ia
ex
ico
M
In
dia
UK
Si
ng
ap
or
e
Ho
ng
Ko
ng
Ne
th
er
lan
ds
0%
Government Tools to Affect GDP
Primary
Fiscal Policy (tax & spend)
Congress
Monetary Policy (money supply & interest rates)
Federal Reserve
Secondary
Regulations
Executive + Congress
Govt. Procurement (fiscal)
Executive + Congress
Grants, subsidies, loans (fiscal)
Executive + Congress
Trade Policy(?)
Executive (USTR) + Congress
Currency ($ valuation & exchange rate)
Executive (Treasury Dept)
Production of goods/services (fiscal)
Executive + Congress
The 2008-2009 Recession and Response
20
00
20 I
00
-II
I
20
01
20 I
01
-II
I
20
02
20 I
02
-II
I
20
03
20 I
03
-II
I
20
04
20 I
04
-II
I
20
05
20 I
05
-II
I
20
06
20 I
06
-II
I
20
07
20 I
07
-II
I
20
08
20 I
08
-II
I
20
09
20 I
09
-II
I
20
10
-I
$12,000
$10,000
Crisis hits
$8,000
-$2,000
Recovery
$6,000
$4,000
Consumption
Investment
Govt.
NX
$2,000
Recession begins
$0
2008-I
2008-II
2008-III
2008-IV
2009-I
2009-II
2009-III
2009-IV
2010-I
2010-II
Consumption
$77.3 billion
117.3
19
-234.8
-54.2
7.1
120.6
90.8
99.3
54.6
Investment
-$61.6 billion
-27.9
-59.6
-205.5
-265.4
-110.2
18.3
89.2
102
102.1
Y = C + I + G + NX
Keynes: G to the rescue (stimulus package)!
The Problem
Between Jan 2008 and Mar 2009:
~$1.6 trillion contraction (C, I, NX) of a ~$14 trillion economy
The Bush/Obama Solutions:
Troubled Asset Relief Program of 2008 (TARP)
=originally $356 billion in spending to bailout financial firms
=now estimated to have made $20 billion in profit for US govt.
American Recovery and Reinvestment Act of 2009 (ARRA)
= $787 billion in spending + tax cuts to boost C & I
= 5%-6% of GDP
(only ~60% of it spent by summer 2010)
Y = C + I + G + NX
Keynes: G to the rescue (stimulus package)!
Comparative Economic Data
GDP 2005
ROW
17%
~150 countries--
Saudi Arabia 1%
Russia 1%
Mexico 2%
S. Korea 2%
United States
30%
India 2%
Brazil 2%
Canada 2%
U.K.
4%
China
5%
Source: World Bank Development Indicators, 2005
Japan
14%
European
M onetary- Union
18%
EMU GDP 2005
Finland 2%
Austria 3%
Belgium 4%
Major Non-Euro, EU
-UK
-Denmark
-Sweden
Portugal 2%
Lux
Ire 2% 0%
Greece 2%
Netherlds 6%
Germany
30%
Spain
10%
Italy
17%
Source: World Bank Development Indicators, 2005
France
22%
European Union
2007
Romania,
Bulgaria
join EU...
Slovenia
joins Euro...
U
Source: World Bank Development Indicators, 2010
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GDP per capita (2008), Top 20 countries
$90,000
$80,000
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$0
Source: World Bank Development Indicators, 2005
Ve
ly
ae
l
ne
zu
el
a
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Sw
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Fr
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A
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B
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Fi
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GDP per Capita 1960 (Top 20 Countries)
$20,000
$18,000
$16,000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
Average GDP Growth, 2000-2005
10.00%
9.17%
8.00%
7.50%
7.33% 7.20%
6.67% 6.50%
6.00%
5.00%
3.00%
2.00% 1.83%
2.50%
1.50% 1.50% 1.17%
1.00% 1.00%
Fr
an
ce
EM
U
Ja
pa
n
Sw
i
G
er tz
m
an
y
-0.33%
Ne
I
th taly
er
la
nd
s
Ha
Zi
it
m
W
ba i
es
b
tB
an we
k/
G
az
a
-5.00%
US
ia
Ire
la
nd
In
d
si
a
Ru
s
-2.50%
UA
E
Ch
in
a
La
tv
ia
Vi
et
na
m
0.00%
-6.00%
-7.50%
-10.00%
Source: World Bank Development Indicators, 2005
-9.50%
(GDP2005-GDP 1980)/(GDP1980)
20 Slowest Growing Economies
0.2
0.2
0.1
0.2
0.2
0.2
0.1
0.1
0.1
0.0
0.0
0.0
0.0
A
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M
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ro
ne
si
R
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G ia
uy
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A
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ja
Cn
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D
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ou
Li
th ti
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M
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sh
M
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ac
ls
ed
on
ia
R
us
si
a
H
ai
K ti
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z
C
on
M go
ol
do
va
U
kr
a
Ta ine
jik
is
ta
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G
eo
rg
ia
Li
be
ria
0.0
-0.1
-0.2
-0.3
-0.4
-0.5
-0.1
-0.2
-0.2
-0.3
-0.4
-0.4
-0.4
-0.5
-0.6
-0.7
Source: World Bank Development Indicators, 2005
-0.7
(GDP2005-GDP 1980)/(GDP1980)
Economic Growth since 1980
10.0
9.3
7.5
5.0
4.2
3.2
2.5
1.7
1.5
1.2
1.1
1.1
1.0
1.0
1.0
0.8
0.8
0.8
0.8
0.8
0.7
0.7
0.7
0.7
Source: World Bank Development Indicators, 2005
U
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0.0
1.0 = doubled in size