UCEAP 2002: International Political Economy and Financial Markets

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UCEAP 2002 International Political Economy and
Financial Markets

• Introduction Welcome to Cambridge!
• Dr Demosthenes Tambakis (PEMBROKE COLLEGE)
• 8 lectures
• Email dnt22_at_cam.ac.uk
• http//www.econ.cam.ac.uk/faculty/Tambakis/
• Ms Elena Loukoianova (QUEENS COLLEGE)
• 4 seminars
• Email el211_at_hermes.cam.ac.uk
• Assessment 45 coursework/45 final/10 seminar
  participation

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LECTURE 1 National Income Accounting and
Balance of Payments (P. Krugman M. Obstfeld
International Macro Theory and Policy, ch. 12)

• The subject of international macroeconomics
• Gross National Product (GNP)
• Closed economy YCIG
• Open Economy YCIGCAX-M
• The components of GNP C, I and G
• GNP (the 1980s) versus GDP (the 1990s)

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The Current Account (CA) Balance

• CA measures changes in a countrys wealth real
  net exports of goods and services
• CAX-Mlt0 current account deficit
• CAlt0 International borrowing
• CAX-Mgt0 current account surplus
• CAgt0 International lending
• Lending/borrowing intertemporal trade
• CAlt0 import present C and export future C (US)
• CAgt0 import future C and export present C (JPN)

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National Saving and the Current Account

• The key national income identities
• National savings S Y - C - G
• Therefore in a closed economy SI
• While in an open economy SICA
• Savings can grow either by raising I or CA
  (accumulating foreign wealth)
• So a countrys CA position its net foreign
  investment

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Distinguishing Private from Government Saving

• Total national savingsPublic Private
• Definition 1 SPY-T-C
• Definition 2 SGT-G
• So SP ICA- SG ICA(G-T)
• Government budget deficits need not always worsen
  the current account
• CA SP I-(G-T)
• Case study (US versus JPN) and Friedmans paper
  (Seminar Reading 1)

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The Capital Account (KA) mirrors the Current
Account

• The KA records net exports of financial assets
  (IOUs)
• A credit on current account is a debit on capital
  account
• A surplus on CA corresponds to a deficit on KA
• The fundamental balance of payments identity
  (paired transactions) CA KA 0
• Capital inflows and outflows
• The statistical discrepancy 97bn. in the US in
  97
• Official central bank reserve transactions
  foreign exchange (FX) and goldBOP (Balance of
  Payments)
• Floating versus fixed exchange rates
• Perfect float CA KA 0
• Fixed CAKA -BOP Official FX Intervention