Homework's Mathematical Methods
The Global Macroeconomy
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Foreign Exchange: Currencies and Crises
Globalization of Finance: Debts and Deficits
Government and Institutions: Policies and Performance
Conclusions
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International macroeconomics is devoted to the study of large-scale economic problems in interdependent economies.
It is macroeconomic because it focuses on key economy-wide variables such as exchange rates, prices, interest rates, income, wealth, and the current account.
It is international because a deeper understanding of the global economy emerges only when the interconnections among nations are fully considered.
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Introduction
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Unique features of international macroeconomics can be reduced to three key elements:
The world has many monies (not one).
Countries are financially integrated (not isolated).
In this context economic policy choices are made.
Introduction
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1 Foreign Exchange: Currencies and Crises
Countries have different currencies, therefore a complete understanding of how a country’s economy works requires that we study the exchange rate (the price of foreign currency).
Because products and investments move across borders, fluctuations in exchange rates have significant effects on the relative prices of home and foreign:
goods (such as autos and clothing),
services (such as insurance and tourism), and
assets (such as equities and bonds).
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Changes in exchange rates affect an economy in two ways:
Changes in exchange rates cause a change in the international relative prices of goods. One country’s goods and services become more or less expensive relative to another’s.
Changes in exchange rates can cause a change in the international relative prices of assets. These fluctuations in wealth can then affect firms, governments, and individuals.
Why Exchange Rates Matter
1 Foreign Exchange: Currencies and Crises
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How Exchange Rates Behave
FIGURE 1-1
Major Exchange Rates The chart shows two key exchange rates from 2003 to 2015. The China–U.S. exchange rate varies little and would be considered a fixed exchange rate, despite a period when it followed a gradual trend. The U.S.–Eurozone exchange rate varies a lot and would be considered a floating exchange rate.
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Based on observable differences in exchange rate behavior, economists divide the world into two groups of countries: those with fixed (or pegged) exchange rates and those with floating (or flexible) exchange rates.
How Exchange Rates Behave
John T. Fowler/Alamy Steve Stock/Alamy
1 Foreign Exchange: Currencies and Crises
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In an exchange rate crisis a currency experiences a sudden and pronounced loss of value against another currency following a period in which the exchange rate had been fixed or relatively stable.
There have been more than 32 exchange rate crises in the 12-year period from 1997 to 2015.
In some cases, including Argentina in 2002, exchange rate crisis lead to governments declaring default (i.e., a suspension of payments).
When Exchange Rates Misbehave
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FIGURE 1-2
Currency Crashes
The chart shows that exchange rate crises are common events. An exchange rate crisis is
defined here as an event in which a currency loses more than 30% of its value in U.S. dollar terms over one year, having changed by less than 20% each of the previous two years.
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Governments in crisis may appeal for external help from international development organizations, such as the International Monetary Fund (IMF) or World Bank, or other countries.
When Exchange Rates Misbehave
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2 Globalization of Finance: Debts and Deficits
Financial globalization has taken hold around the world, starting in the economically advanced countries and spreading to many emerging market countries.
Deficits and Surpluses: The Balance of Payments
At the national level, economic measurements such as income, expenditure, deficit, and surplus, are important barometers of economic performance, and the subject of heated policy debate.
The income measure is called gross national disposable income; the expenditure measure is called gross national expenditure. The difference between the two is a key macroeconomic aggregate called the current account.
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TABLE 1-1 (1 of 2)
Income, Expenditure, and the Current Account The table shows data for the United States from 1990 to 2015 in billions of U.S. dollars. During this period, in all but one year U.S. expenditure exceeded income, with the U.S. current account in deficit. The last (small) surplus was in 1991.
Deficits and Surpluses: The Balance of Payments
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Inflation Performance and the Exchange Rate Regime
| Income Gross National Disposable Income | Expenditure Gross National Expenditure | Difference Current Account | ||
| 1990 | $5,983 | $6,058 | –$75 | |
| 1991 | 6,211 | 6,203 | 8 | |
| 1992 | 6,529 | 6,574 | –46 | |
| 1993 | 6,865 | 6,944 | –79 | |
| 1994 | 7,287 | 7,401 | –115 | |
| 1995 | 7,649 | 7,754 | –105 | |
| 1996 | 8,083 | 8,197 | –114 | |
| 1997 | 8,581 | 8,711 | –129 | |
| 1998 | 9,047 | 9,252 | –205 | |
| 1999 | 9,631 | 9,917 | –287 | |
| 2000 | 10,257 | 10,661 | –404 | |
| 2001 | 10,602 | 10,991 | –389 | |
| 2002 | 10,953 | 11,404 | –451 | |
| 2003 | 11,499 | 12,014 | –516 | |
| 2004 | 12,267 | 12,894 | –627 |
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TABLE 1-1 (2 of 2)
Deficits and Surpluses: The Balance of Payments
2 Globalization of Finance: Debts and Deficits
Inflation Performance and the Exchange Rate Regime (continued)
| Income Gross National Disposable Income | Expenditure Gross National Expenditure | Difference Current Account | ||
| 2005 | 13,077 | 13,815 | –738 | |
| 2006 | 13,825 | 14,627 | –802 | |
| 2007 | 14,478 | 15,196 | –718 | |
| 2008 | 14,750 | 15,442 | –692 | |
| 2009 | 14,432 | 14,814 | –382 | |
| 2010 | 15,031 | 15,477 | –446 | |
| 2011 | 15,616 | 16,098 | –482 | |
| 2012 | 16,253 | 16,721 | –468 | |
| 2013 | 16,776 | 17,172 | –396 | |
| 2014 | 17,477 | 17,878 | –401 | |
| 2015 | 18,011 | 18,476 | –465 | |
| Data from: U.S. National Income and Product Accounts, Tables 1.1.5 and 4.1 (rev. April 28, 2016), bea.gov. |
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FIGURE 1-3
Global Imbalances For more than a decade, the United States current account deficit has accounted for about half of all deficits globally. Major offsetting surpluses have been seen in Asia (e.g., China and Japan) and in oil-exporting countries.
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Debtors and Creditors: External Wealth
Total wealth or net worth is equal to your assets (what others owe you) minus your liabilities (what you owe others).
When you run a surplus, and save money (buying assets or paying down debt), your total wealth, or net worth, tends to rise.
Similarly, when you have a deficit and borrow (taking on debt or running down savings), your wealth tends to fall.
From an international perspective, a country’s net worth is called its external wealth and it equals the difference between its foreign assets (what it is owed by the rest of the world) and its foreign liabilities (what it owes to the rest of the world).
Positive external wealth makes a country a creditor nation; negative external wealth makes it a debtor nation.
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Debtors and Creditors: External Wealth
FIGURE 1-4
External Wealth A country’s net credit position with the rest of the world is called external wealth. The time series charts show levels of external wealth from 1980 to 2007 for the United States in panel (a) and Argentina in panel (b). All else equal, deficits cause external wealth to fall; surpluses (and defaults) cause it to rise.
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3 Government and Institutions: Policies and Performance
Government actions influence economic outcomes in many ways by making decisions about exchange rates, macroeconomic policies, debt repayment, and so on.
To gain a deeper understanding of the global macroeconomy, economists study policies, rules and norms, or regimes in which policy choices are made.
At the broadest level, research also focuses on institutions, a term that refers to the overall legal, political, cultural, and social structures that influence economic and political actions.
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Three important features of the broad macroeconomic environment we will consider include:
the rules that a government decides to apply to restrict or allow capital mobility,
the decision that a government makes between a fixed and a floating exchange rate regime, and
the institutional foundations of economic performance, such as the quality of governance that prevails in a country.
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International trade has grown as trade barriers have diminished, and many nations have encouraged international capital movement by lifting restrictions on financial transactions.
Three groups of countries that will figure often in our analysis are:
Advanced countries—countries with high levels of income per person that are well integrated into the global economy
Emerging markets—mainly middle-income countries that are growing and becoming more integrated into the global economy
Developing countries—mainly low-income countries that are not yet well integrated into the global economy
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Integration and Capital Controls: The Regulation of International Finance
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FIGURE 1-5
Financial Globalization Since the 1970s, many restrictions on international financial transactions have been lifted, as shown by the time series chart in panel (a). The volume of transactions has also increased dramatically, as shown in panel (b). These trends have been strongest in the advanced countries, followed by the emerging markets and the developing countries.
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Independence and Monetary Policy: The Choice of Exchange Rate Regimes
FIGURE 1-6
Exchange Rate Regimes The pie chart shows a classification of exchange rate regimes around the world using the most recent data for the year 2010.
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Independence and Monetary Policy: The Choice of Exchange Rate Regimes
Despite the abundance of currencies, we also see newly emerging forms of monetary organization.
Some groups of countries have sought to simplify their transactions through the adoption of a common currency with shared policy responsibility. The most notable example is the Eurozone.
Still other countries have chosen to use currencies over which they have no policy control, as with the recent cases of dollarization in El Salvador and Ecuador.
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