Chapter_9_An_Introduction_to_Internation

The surplus country buys the assets with its excess

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The surplus country buys the assets with its excess income. This causes changes in ownership of the assets. This leads us naturally to consider the implications of these activities for a nation’s wealth.
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Debtors and Creditors: External Wealth Wealth = assets – liabilities What others owe you, minus what you owe them. A measure of a “net worth” When you borrow, your liabilities rise, reducing net worth When you lend, your assets rise, increasing net worth. The same principle applies to countries Countries experience changes in external wealth External wealth = external assets – external liabilities Changes in external wealth may reflect a country borrowing (foreign liabilities increase) or lending (foreign assets increase) from/to other countries. They may also reflect capital gains and losses External wealth > 0 → Creditor External wealth < 0 → Debtor
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Debtors and Creditors: External Wealth External wealth changes for several reasons. w Countries with … § Current account deficits borrow from the rest of the world (foreign liabilities increase) this is how they pay for expenditure > income this reduces external wealth § Current account surpluses lend to the rest of the world (foreign assets increase) use with the funds saved from income > expenditure this increases external wealth
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Debtors and Creditors: External Wealth w Changes in the value of foreign assets or foreign liabilities also affect external wealth § Example 1: An increase in the price of Australian gold mining stocks leads to capital gains for the stock owners – some of whom are U.S. residents. This leads to an increase in foreign assets for the U.S. and an increase in U.S. external wealth. There is simultaneously a decrease in Australian external wealth.
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Debtors and Creditors: External Wealth w Changes in the value of foreign assets or foreign liabilities also affect external wealth § Example 2: Default on foreign liabilities An Argentine default on foreign liabilities effectively eliminates the nation’s foreign debt, causing an increase in the country’s external wealth. All the foreign debt holders experience equal and opposite capital losses, a decrease in external wealth for their countries.
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Darlings and Deadbeats: Defaults and Other Risks Since 1980, 14 countries have defaulted on their debt as a result of exchange rate crises; Of these 14, half have defaulted twice since 1980. Why do countries default? Upside: default improves their external wealth position. The downside?
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