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30 Cards in this Set

  • Front
  • Back
Intl Macro Economics is tied together by 3 main point
World has many currencies

Countries are Financially Integrated

In this context Policy choices are made (not usually very well)
Exchange Rate
(review using econ110 book/notes)
the price of foreign currency
2 Kinds of exchange Rates
Fixed (pegged)
China/U.S.

Floating (flexible)
U.S./Eurozone
2 Primary ways the exchange rates can affect the economy
1. changing the international relative prices of goods

2. changing the international relative prices of assets
Review Volkswagon example on page 437
now
Exchange rate Crisis
a currency expriences a sudden and pronounced loss of value against another currency, following a period in which the exchange rate had been fixed or relatively stable
International Development Organizations
International Monetary Fund (IMF)

World Bank
Financial Instruments
What Does Financial Instrument Mean?
A real or virtual document representing a legal agreement involving some sort of monetary value. In today's financial marketplace, financial instruments can be classified generally as equity based, representing ownership of the asset, or debt based, representing a loan made by an investor to the owner of the asset. Foreign exchange instruments comprise a third, unique type of instrument. Different subcategories of each instrument type exist, such as preferred share equity and common share equity, for example.

Financial instruments can be thought of as easily tradeable packages of capital, each having their own unique characteristics and structure. The wide array of financial instruments in today's marketplace allows for the efficient flow of capital amongst the world's investors.

If the current account is positive then
the country has a SURPLUS
Current Account
the difference between the gross national disposable income, and the gross national expenditure
how is the difference in the U.S.' spending bridged?
financial transactions (borrowing) from the rest of the world
It is impossible for the world to run a deficit
true

bc the the world as a whole is a closed economy in itself.

Thus if a country (like the U.S.) is a net BORROWER running a current account deficit , then the rest of the world must be a net LENDER to that country, running surpluses.

Globally the world's finances must balance this way, but individuals and countries and regions can exhibit pronounced imbalances one way or the other.
Total wealth or net worth is equal to
your assests (what others owe you) minus your liabilities (what you owe others)

A country's measured net worth is called EXTERNAL WEALTH
External Wealth
equal to the difference between its foreign assets, and foreign liabilities

Positive external wealth makes a country a creditor nation; negative external wealth makes it a debtor nation
Changes in external wealth can result from imbalances in the nation's current account
a surplus leads external wealth to rise and a deficit leads to a fall (all else equal)
External wealth can be affected by capital gains on investments
true.

increase or decrease in value of assets/investments
A country can gain not only by haing the vlue of its assets rise, but also by having the value of its____ fall
liabilities

default = wiping away of liabilities = net increase in external wealth
External wealth rises when...
creditors are paid off

OR

BLOWN OFF (default)
Emerging markets ofetn find themselves subject to lower grade financial ratings
true
Bonds rated BBB- or higher are considered high-grade or INVESTMENT-GRADE BONDS
True

bonds rated BB+ and lower are called JUNK BONDS

poorer ratings go hand in hand with higher interst rates, commonly meaured by COUNTRY RISK
Country Risk
the additional annual interest paid by a governmetn on its bonds compared with the interest paid on a safe "benchmark" U.S. Treasure bond.
The rules that a government decides to apply to restrict or allow capital mobility

the decision that a governemtn makes between a fixed and a floating exchange rate regime


the institutional foundations of economic performance (quality of governance that prevails in a country)
three important features of broad macroeconomic environment
Three groups of Countries
Advanced Countries:
high levels of income per capita that are well integrated into global economy


Emerging Markets--Mainly middle income countries


Developing Countries: mainly low-income countries that are not yet well integrated into the global economy
Regimes
slightly larger policy spaces as sets of rules
Better Government institutions are correlated with more income/capita
true

agovt. that is unaccountable, unstable, ineffective, corrput is unlikely to encourage business, investment, and innovation
The great divergence
the large gap between advanced countries and developing countries income/person
have TA explain fig. 12-9 to you
yes!
better govt institutions are correlated with
LESS income volatility
if a country is financially open, then a fixed exchange rate is incompatible with the exercise of monetary policy
true
Chapter Summary
Countries have different currencies, and the price at which these currencies trade is known as the exchange rate. An important goal is to understand what determines this exchange rate and how the exchange rate is linked to the rest of teh economiy. Along the way, we confront various questions: Why do some countries have fixed exchange rates and others floating? why do some go from one to the other, often via a crisis? Why do some countries have no currency of their own?



Countries are financially integrated, and this allows them to decouple thier level o income from their level of expenditure, with the difference being known as the CURRENT ACCOUNT. An important goal is to understand what determins the current account and how the current account is linked to the rest of the economy. Along the way we confront various questions: How doesthe current account affect a country's wealth? How are the resulting creits and debts settled? Is the current account constrained in any way, and how does adjustment take