Lecture 1: Open-Economy Macroeconomics and International Finance: introduction

Transcription

1 Macroeconomics of the Open Economy Lecture 1: Open-Economy Macroeconomics and International Finance: introduction Dr Gabriela Grotkowska

2 Macroeconomics of the Open Economy Lecture (30 h) + tutorial (30 h) Examination: multiple choice + open questions (graphs, definitions, problems to solve) Final grade: 20% (tutorial) + 80% (final exam) Website: Mail address: ggrotkowska@wne.uw.edu.pl Office hours: TBA 2

3 Structure of the course What is it all about? Two legs: Open-economy Macroeconomics International finance Finance and macro: does a fact that we consider an open economy change anything? Specifics of an open economy New problems and challanges (external equilibrium) Four dimensions: Theory Evidence Policy Institutions Two key notions: Exchange rate Balance of payments 3

4 Structure of the course Introduction: technical information, course content overview, basic notions Balance of payments: accountancy of international flow of good and assets; structure of the balance of payments: a double entry rule; basic identity of balance of payments; balance of payments equilibrium; savings, investments and current account: twin deficits hypothesis Classic approach to balance of payments structure: intertemporal approach; Savings and investments in the classic model (role of economic policy); intertemporal optimalisation (pure exchange and production case), intertemporal comparative advantage 4

5 Structure of the course Exchange rate and exchange market: participants and transitions, basic instruments and operations, equilibrium setting, two- and three currency arbitrage Determinants of the exchange rate: In the short run: interest rate parity (market efficiency, links with money market) In the long run: purchasing power parity Balassa-Samuelson effect 5

6 Structure of the course Long-run equilibrium: monetary model of balance of payments and exchange rate Money supply and balance of payments Overshooting of the exchange rate: role of expectations and short-run market rigidity Elasticity approach to exchange market equilibrium (Marshal Lerner condition for devaluation efficiency), J-curve, exchange market stability 6

7 Structure of the course Multiplier approach to the balance of payments equilibrium; internal and external equilibrium: Swan diagram Mundel-Flemming model of short-run macroeconomic equilibrium Macroeconomic policy in an open economy (floating exchange rate versus fixed exchange rate regime) Currency crises different approaches 7

8 Structure of the course International monetary system Currency union: optimal currency area, economic aspects of convergence criteria, nominal and real convergence 8

9 Literature and other materials G. Gandolfo, International Finance and Open-Economy Macroeconomics, Springer 2002 C.P. Hallwood, R. MacDonald, International Money and Finance, Blackwell 2000 P. Krugman and M. Obstfeld, Intenrational economics, Theory and Practive, Addison-Wesley 2005 R. Caves, J. Frankel, R. Jones, World trade and payments : an introduction, Harper Collins

10 Autarky versus open economy Autarchic Economy Open economy: exchange of goods and services capital flows (international investment and lending activities) intertemporal trade international migrations financial aspects flows of income and remittances economic integration (FTA, customs union, single market, monetary union, economic union) macroeconomic links The concept of the global economy 10

11 Biggest economies GDP of biggest economies in 2008, bln USD, Nominal exchange rate Source: World Bank 2010 USA is inhabilted with 4.6% of the world population, but produces 25$ of the world GDP. Three biggest high income economies (USA, Japan and Germany) produce almost 40% of the world GDP, although are inhabilted by only 6% of the world population. China and India is populated with 37.3% of the world population, but produce 9.3 % of the world GDP. Ten years ago, it was only 3.6%! Three biggest economies produce about 40% of the world GDP. Share of Poland in the world GDP is equal to 0.9%. 11

12 Biggest economies GDP of the biggest economies in 2008, bln USD, according to nominal wxchange rate corrected for PPP, źródło: World Bank 2010 United States China Japan India Germany Russian Federation United Kingdom France Brazil Italy Mexico Spain Korea, Rep. of Canada Turkey By PPP By nominal exchange rate After corrections for PP, three biggest economies are: USA, China and India. Share of Poland in the world PGD rises up to 1% In both cases we are 19th in the world. 12

13 Multinational entreprises Multinational corporations (MNC): particular actors in the world economy Their importance for trade and capital flows List of top 500 enterprises rtune/global500/2008/full_list/ For comparison GDP: Ireland: 200 bln $ Poland 300 bln $ Belgium 400 bln $ Russia 600 bln $ In which economic sectors MNC operate? Where do they come from? 13

14 Trade and investments grow faster than GDP Trade, GDP and FDI 10 % % + 1.9% x Growth of world production (GDP) Growth of the world exports Changes in world flows of FDI 14

15 Characteriscs of FOREX 15

16 Characteriscs of FOREX 16

17 Characteriscs of FOREX Struktura geograficzna światowego rynku walutowego (BIS, 2010) United Kingdom United States Japan Singapore Switzerland Hong Kong SAR Australia France 2% 3% 4% 5% 2% 13% 37% 5% 5% 6% 18% 17

18 China in world trade systems China: new player in the world economy 18

19 Rise of imbalances GLOBAL CURRENT ACCOUNT BALANCES (per cent of World Output) US Oil Exporters Germany and Japan Other Deficit Countries China and East Asia Rest of World Discrepancy 19

20 China trade surplus Source: IMF WEO CURRENT ACCOUNTS OF WORD'S THREE LARGEST SURPLUS COUNTRIES ($bn) $ $ $ $ $ $0.00 -$ China Germany Japan 20