Econ 161-Lecture 12

Econ 161-Lecture 12 - Lecture12 c ⃝ Marc-AndreasMuendler...

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Unformatted text preview: GlobalIntegrationofLatinAmerica Lecture12 c ⃝ Marc-AndreasMuendler UniversityofCalifornia,SanDiego May12,2011 12.InternationalCapitalFlowsandGrowth Econ161, c ⃝ M.Muendler InternationalCapitalFlowsandGrowth • Lendingcountriesbenefitfromforeignreturnsanddiversifiedinvest- ments • Borrowingcountriesbenefitfromotherwiseunavailablecapitaltode- veloptheirdomesticproductivepotential • Unconditionalavailabilityofofficialcreditmaydistortdevelopmentin- centivesinborrowercountries • Theremovalofindividualcountry-specificobstaclestogrowthmay resultingrowthspurts 12.InternationalCapitalFlowsandGrowth Econ161, c ⃝ M.Muendler ARationalLender’sPerspective • Returnstoforeigninvestmentsexceeddomesticreturnsinautarky foralendercountry • Thelenderinvestscurrentincomeabroad( CA surplus)inexchange forfutureincomefromabroad( CA deficit) • Theborrowerisexpectedtoinvesttheadditionalborrowinginpro- ductiveuses( abilitytorepay ) • Theborrowerisexpectedtousefutureincomeforrepayment ( willingnesstorepay ) 12.InternationalCapitalFlowsandGrowth Econ161, c ⃝ M.Muendler InternationalLendingandBorrowing Consumption and IncomeToday (MEX,CA) C o n s u m p t io n a n d I n c o m e T o m o r r o w (M E X ,C A ) C , Y tomorrow tomorrow C ,Y today today 12.InternationalCapitalFlowsandGrowth Econ161, c ⃝ M.Muendler InternationalLendingandBorrowing 1 PPF 1 +r* in world equilibrium Consumption and IncomeToday (MEX,CA) C o n s u m p t io n a n d I n c o m e T o m o r r o w (M E X ,C A ) C , Y tomorrow tomorrow Y tomorrow C tomorrow C today (1 ) +r* CA today . C ,Y today today Y today I today A W W CA today Y today PPF A W W 1 1 +r* 1 +r* I today C today C tomorrow Y tomorrow CA today (1 ) +r* CA today . MEX MEX MEX MEX MEX MEX MEX MEX CA CA CA CA CA CA CA CA MEX CA 12.InternationalCapitalFlowsandGrowth Econ161, c ⃝ M.Muendler Capital,RiskandInsurance • Internationalcapitalmarketsareadevicetoprovideinsuranceacross statesofnature inthefuture • Theabilityof(international)capitalmarketstoprovideinsurancede- pendson – The verifiability ofstatesofnature – The enforceability ofcontractualstipulations – The prevention ofhiddenactions 12.InternationalCapitalFlowsandGrowth Econ161, c ⃝ M.Muendler InternationalPortfolioChoice • Riskaverseinvestorsappreciatebothhighreturnsandlowrisk • Theprospectoflittlevariationinfuturereturnsoninvestmentissimi- lartoinsurance • Littlevariationinfuturereturnsguaranteesasteadylevelofincome andconsumption • Adiversificationofinvestmentstodifferentcountriesreducesthevari- ationinfuturereturnsinaportfolio 12.InternationalCapitalFlowsandGrowth Econ161, c ⃝ M.Muendler InternationalDiversificationofInvestments • Supposethereareonlytwopossiblestatesofnaturetomorrow:...
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This note was uploaded on 08/14/2011 for the course ECON 161 taught by Professor Muendler during the Spring '11 term at San Diego.

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Econ 161-Lecture 12 - Lecture12 c ⃝ Marc-AndreasMuendler...

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