Topics in International Economics

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Topics in International Economics

• Ch 1. Introduction

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T1 The U.S. as the largest debtor

• The US current account deficit increased to 144
  billion in 2004Q1 from 127billion in 2003Q4.
  (US GDP in 2003 11,000 billion)
• Why does it arise?
• Why does it matter?

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• Net international investment position declines
  each period by the amount of current account
  deficit.
• As a result of large current account deficits in
  the 1980s and 90s, the US became the largest
  debtor in the world.
• NIIP of the US -2430 billion (2003)
  -2233 billion (2002)
• It is important to compare these numbers to the
  size of the economy.

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T2The euro

• The euro, introduced in 1999, became the currency
  of 12 EU members.
• Germany, France, Italy, Belgium, Netherlands,
  Luxemburg, Ireland, Spain, Portugal, Austria,
  Finland, Greece
• What are the benefits and costs of the monetary
  union (giving up own national currencies and
  adopting a common currency)?
• Why did the UK, Sweden, and Denmark opt out?

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Dollarization

• In a different context, El Salvador has adopted
  the US dollar as legal tender.
• A new meaning of dollarization
• Why would any country want to give up its own
  currency and adopt some other countrys currency?

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T3 Exchange rate movements

• Exchange rate movements have been large.
• Can we explain them?
• Are flexible exchange rates more desirable than
  fixed rates?
• http//www.x-rates.com/

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T4 Financial Crises

• Currency crises became more frequent.
• ERM (exchange rate mechanism), 1992
• Mexico, 1994
• East Asia, 1997
• Big devaluations and subsequent economic
  collapses
• How to explain currency crises? How to prevent
  them?

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T5 Choice of exchange rate regime

• Chinese Renminbi had been pegged to the US dollar
  since 1994 until recently.
• Large trade surpluses of China became a political
  issue.
• The US government and many economists recommend
  increased exchange rate flexibility.
• China revalued the RMB from 8.28 to 8.11 yuan per
  USD on July 22, 2005. The currency has been on
  managed float ever since.
• What kind of exchange rate system would be most
  appropriate for China?