Introduction To International Finance PDF

Introduction to International Finance International Finance Sookmyung Women’s University Young-Kyu Moh Introduction to International Finance Outline 1 What Is International Economics About? 2 International Trade Topics Gains from Trade Patter...

Introduction to International Finance International Finance Sookmyung Women’s University Young-Kyu Moh Introduction to International Finance Outline 1 What Is International Economics About? 2 International Trade Topics Gains from Trade Patterns of Trade Effects of Government Policies on Trade 3 International Finance Topics National Income Accounts Exchange Rates International Policy Coordination International Capital Market Young-Kyu Moh Introduction to International Finance Outline 1 What Is International Economics About? 2 International Trade Topics Gains from Trade Patterns of Trade Effects of Government Policies on Trade 3 International Finance Topics National Income Accounts Exchange Rates International Policy Coordination International Capital Market Young-Kyu Moh Introduction to International Finance What Is International Economics About? International Economics is about how nations interact 1 through trade of goods and services 2 through flows of money 3 through investment International economics is an old subject But it continues to grow in importance as countries become tied to the international economy Young-Kyu Moh Introduction to International Finance What Is International Economics About? International Economics is about how nations interact 1 through trade of goods and services 2 through flows of money 3 through investment International economics is an old subject But it continues to grow in importance as countries become tied to the international economy Young-Kyu Moh Introduction to International Finance What Is International Economics About? International Economics is about how nations interact 1 through trade of goods and services 2 through flows of money 3 through investment International economics is an old subject But it continues to grow in importance as countries become tied to the international economy Young-Kyu Moh Introduction to International Finance What Is International Economics About? International Economics is about how nations interact 1 through trade of goods and services 2 through flows of money 3 through investment International economics is an old subject But it continues to grow in importance as countries become tied to the international economy Young-Kyu Moh Introduction to International Finance What Is International Economics About? International Economics is about how nations interact 1 through trade of goods and services 2 through flows of money 3 through investment International economics is an old subject But it continues to grow in importance as countries become tied to the international economy Young-Kyu Moh Introduction to International Finance What Is International Economics About? International Economics is about how nations interact 1 through trade of goods and services 2 through flows of money 3 through investment International economics is an old subject But it continues to grow in importance as countries become tied to the international economy Young-Kyu Moh Introduction to International Finance What Is International Economics About? International Trade International trade as a fraction of the national economy has tripled for the US in the past 40 years Exports and imports as a percentage of U.S. national income Young-Kyu Moh Introduction to International Finance What Is International Economics About? International Trade Compared to the US, other countries are even more tied to international trade Average of exports and imports as a percentage of national income in 2018 Young-Kyu Moh Introduction to International Finance What Is International Economics About? Trade versus Finance International Trade focuses on transactions of real goods and services across nations International Finance (Open Economy Macroeconomics) focuses on financial or monetary transactions across nations Young-Kyu Moh Introduction to International Finance What Is International Economics About? Trade versus Finance International Trade focuses on transactions of real goods and services across nations These transactions usually involve a physical movement of goods or a commitment of tangible resources like labor services International Finance (Open Economy Macroeconomics) focuses on financial or monetary transactions across nations Young-Kyu Moh Introduction to International Finance What Is International Economics About? Trade versus Finance International Trade focuses on transactions of real goods and services across nations International Finance (Open Economy Macroeconomics) focuses on financial or monetary transactions across nations Young-Kyu Moh Introduction to International Finance What Is International Economics About? Trade versus Finance International Trade focuses on transactions of real goods and services across nations International Finance (Open Economy Macroeconomics) focuses on financial or monetary transactions across nations For example, purchases of US dollars or financial assets by Europeans Young-Kyu Moh Introduction to International Finance Outline 1 What Is International Economics About? 2 International Trade Topics Gains from Trade Patterns of Trade Effects of Government Policies on Trade 3 International Finance Topics National Income Accounts Exchange Rates International Policy Coordination International Capital Market Young-Kyu Moh Introduction to International Finance International Trade Topics 1 Gains from trade 2 Explaining patterns of trade 3 Effects of government policies on trade Young-Kyu Moh Introduction to International Finance International Trade Topics 1 Gains from trade 2 Explaining patterns of trade 3 Effects of government policies on trade Young-Kyu Moh Introduction to International Finance International Trade Topics 1 Gains from trade 2 Explaining patterns of trade 3 Effects of government policies on trade Young-Kyu Moh Introduction to International Finance International Trade Topics 1 Gains from trade 2 Explaining patterns of trade 3 Effects of government policies on trade Young-Kyu Moh Introduction to International Finance International Trade Topics Gains from Trade Several ideas underlie the gains from trade (a) When a buyer and a seller engage in a voluntary transaction, both receive something that they want and both can be made better off Norwegian consumers could buy oranges through international trade that they otherwise would have a difficult time producing The producer of the oranges receives income that it can use to buy the things that it desires Young-Kyu Moh Introduction to International Finance International Trade Topics Gains from Trade Several ideas underlie the gains from trade (a) When a buyer and a seller engage in a voluntary transaction, both receive something that they want and both can be made better off Norwegian consumers could buy oranges through international trade that they otherwise would have a difficult time producing The producer of the oranges receives income that it can use to buy the things that it desires Young-Kyu Moh Introduction to International Finance International Trade Topics Gains from Trade Several ideas underlie the gains from trade (a) When a buyer and a seller engage in a voluntary transaction, both receive something that they want and both can be made better off Norwegian consumers could buy oranges through international trade that they otherwise would have a difficult time producing The producer of the oranges receives income that it can use to buy the things that it desires Young-Kyu Moh Introduction to International Finance International Trade Topics Gains from Trade Several ideas underlie the gains from trade (a) When a buyer and a seller engage in a voluntary transaction, both receive something that they want and both can be made better off Norwegian consumers could buy oranges through international trade that they otherwise would have a difficult time producing The producer of the oranges receives income that it can use to buy the things that it desires Young-Kyu Moh Introduction to International Finance International Trade Topics Gains from Trade Several ideas underlie the gains from trade (b) How could a country that is the most (least) efficient producer of everything gain from trade? With a finite amount of resources, countries can use those resources to produce what they are most productive at (compared to their other production choices), then trade those products for goods and services that they want to consume Countries can specialize in production, while consuming many goods and services through trade Young-Kyu Moh Introduction to International Finance International Trade Topics Gains from Trade Several ideas underlie the gains from trade (b) How could a country that is the most (least) efficient producer of everything gain from trade? With a finite amount of resources, countries can use those resources to produce what they are most productive at (compared to their other production choices), then trade those products for goods and services that they want to consume Countries can specialize in production, while consuming many goods and services through trade Young-Kyu Moh Introduction to International Finance International Trade Topics Gains from Trade Several ideas underlie the gains from trade (b) How could a country that is the most (least) efficient producer of everything gain from trade? With a finite amount of resources, countries can use those resources to produce what they are most productive at (compared to their other production choices), then trade those products for goods and services that they want to consume Countries can specialize in production, while consuming many goods and services through trade Young-Kyu Moh Introduction to International Finance International Trade Topics Gains from Trade Several ideas underlie the gains from trade (c) Trade is predicted to benefit a country by making it more efficient when it exports goods which use abundant resources and imports goods which use scarce resources (d) When countries specialize, they may also be more efficient due to large scale production (e) Countries may also gain by trading current resources for future resources (lending and borrowing) Young-Kyu Moh Introduction to International Finance International Trade Topics Gains from Trade Several ideas underlie the gains from trade (c) Trade is predicted to benefit a country by making it more efficient when it exports goods which use abundant resources and imports goods which use scarce resources (d) When countries specialize, they may also be more efficient due to large scale production (e) Countries may also gain by trading current resources for future resources (lending and borrowing) Young-Kyu Moh Introduction to International Finance International Trade Topics Gains from Trade Several ideas underlie the gains from trade (c) Trade is predicted to benefit a country by making it more efficient when it exports goods which use abundant resources and imports goods which use scarce resources (d) When countries specialize, they may also be more efficient due to large scale production (e) Countries may also gain by trading current resources for future resources (lending and borrowing) Young-Kyu Moh Introduction to International Finance International Trade Topics Gains from Trade Trade is predicted to benefit countries as a whole in several ways, but trade may harm particular groups within a country Young-Kyu Moh Introduction to International Finance International Trade Topics Gains from Trade Trade is predicted to benefit countries as a whole in several ways, but trade may harm particular groups within a country Trade is predicted to benefit a country by making it more efficient when it exports goods which use abundant resources and imports goods which use scarce resources Young-Kyu Moh Introduction to International Finance International Trade Topics Gains from Trade Trade is predicted to benefit countries as a whole in several ways, but trade may harm particular groups within a country Trade may therefore have effects on the distribution of income within a country Young-Kyu Moh Introduction to International Finance International Trade Topics Gains from Trade Trade is predicted to benefit countries as a whole in several ways, but trade may harm particular groups within a country Conflicts about trade should occur between groups within countries rather than between countries Young-Kyu Moh Introduction to International Finance International Trade Topics Patterns of Trade Differences in climate and resources Differences in labor productivity may explain why some countries export certain products How relative supplies of capital, labor and land are used in the production of different goods may also explain why some countries export certain products Young-Kyu Moh Introduction to International Finance International Trade Topics Patterns of Trade Differences in climate and resources Differences in climate and resources can explain why Brazil exports coffee and Australia exports iron ore Differences in labor productivity may explain why some countries export certain products How relative supplies of capital, labor and land are used in the production of different goods may also explain why some countries export certain products Young-Kyu Moh Introduction to International Finance International Trade Topics Patterns of Trade Differences in climate and resources But why does Japan export automobiles, while the US exports aircraft? Differences in labor productivity may explain why some countries export certain products How relative supplies of capital, labor and land are used in the production of different goods may also explain why some countries export certain products Young-Kyu Moh Introduction to International Finance International Trade Topics Patterns of Trade Differences in climate and resources Differences in labor productivity may explain why some countries export certain products How relative supplies of capital, labor and land are used in the production of different goods may also explain why some countries export certain products Young-Kyu Moh Introduction to International Finance International Trade Topics Patterns of Trade Differences in climate and resources Differences in labor productivity may explain why some countries export certain products How relative supplies of capital, labor and land are used in the production of different goods may also explain why some countries export certain products Young-Kyu Moh Introduction to International Finance International Trade Topics Effects of Government Policies on Trade Policymakers affect the amount of trade through What are the costs and benefits of these policies? Economists design models that try to measure the effects of different trade policies Young-Kyu Moh Introduction to International Finance International Trade Topics Effects of Government Policies on Trade Policymakers affect the amount of trade through Tariffs: a tax on imports or exports What are the costs and benefits of these policies? Economists design models that try to measure the effects of different trade policies Young-Kyu Moh Introduction to International Finance International Trade Topics Effects of Government Policies on Trade Policymakers affect the amount of trade through Quotas: a quantity restriction on imports or exports What are the costs and benefits of these policies? Economists design models that try to measure the effects of different trade policies Young-Kyu Moh Introduction to International Finance International Trade Topics Effects of Government Policies on Trade Policymakers affect the amount of trade through Export subsidies: a payment to producers that export What are the costs and benefits of these policies? Economists design models that try to measure the effects of different trade policies Young-Kyu Moh Introduction to International Finance International Trade Topics Effects of Government Policies on Trade Policymakers affect the amount of trade through Other regulations that exclude foreign products from the market, but still allow domestic products What are the costs and benefits of these policies? Economists design models that try to measure the effects of different trade policies Young-Kyu Moh Introduction to International Finance International Trade Topics Effects of Government Policies on Trade Policymakers affect the amount of trade through What are the costs and benefits of these policies? Economists design models that try to measure the effects of different trade policies Young-Kyu Moh Introduction to International Finance International Trade Topics Effects of Government Policies on Trade Policymakers affect the amount of trade through What are the costs and benefits of these policies? Economists design models that try to measure the effects of different trade policies Young-Kyu Moh Introduction to International Finance International Trade Topics Effects of Government Policies on Trade Policymakers affect the amount of trade through What are the costs and benefits of these policies? Economists design models that try to measure the effects of different trade policies If a government must restrict trade, which policy should it use? Young-Kyu Moh Introduction to International Finance International Trade Topics Effects of Government Policies on Trade Policymakers affect the amount of trade through What are the costs and benefits of these policies? Economists design models that try to measure the effects of different trade policies If a government must restrict trade, how much should it restrict trade? Young-Kyu Moh Introduction to International Finance International Trade Topics Effects of Government Policies on Trade Policymakers affect the amount of trade through What are the costs and benefits of these policies? Economists design models that try to measure the effects of different trade policies If a government restricts trade, what are the costs if foreign governments respond likewise? Young-Kyu Moh Introduction to International Finance Outline 1 What Is International Economics About? 2 International Trade Topics Gains from Trade Patterns of Trade Effects of Government Policies on Trade 3 International Finance Topics National Income Accounts Exchange Rates International Policy Coordination International Capital Market Young-Kyu Moh Introduction to International Finance International Finance Topics 1 National Income Accounts 2 Exchange Rates 3 International Policy Coordination 4 International Capital Market Young-Kyu Moh Introduction to International Finance International Finance Topics 1 National Income Accounts 2 Exchange Rates 3 International Policy Coordination 4 International Capital Market Young-Kyu Moh Introduction to International Finance International Finance Topics 1 National Income Accounts 2 Exchange Rates 3 International Policy Coordination 4 International Capital Market Young-Kyu Moh Introduction to International Finance International Finance Topics 1 National Income Accounts 2 Exchange Rates 3 International Policy Coordination 4 International Capital Market Young-Kyu Moh Introduction to International Finance International Finance Topics 1 National Income Accounts 2 Exchange Rates 3 International Policy Coordination 4 International Capital Market Young-Kyu Moh Introduction to International Finance International Finance Topics National Income Accounts Governments measure 1 the value of exports and imports 2 the value of international financial capital 3 the measure of official settlements balance (the balance of payments): the balance of funds that central banks use for official international payments All three values are measured in the government’s national income accounts Young-Kyu Moh Introduction to International Finance International Finance Topics National Income Accounts Governments measure 1 the value of exports and imports 2 the value of international financial capital 3 the measure of official settlements balance (the balance of payments): the balance of funds that central banks use for official international payments All three values are measured in the government’s national income accounts Young-Kyu Moh Introduction to International Finance International Finance Topics National Income Accounts Governments measure 1 the value of exports and imports 2 the value of international financial capital 3 the measure of official settlements balance (the balance of payments): the balance of funds that central banks use for official international payments All three values are measured in the government’s national income accounts Young-Kyu Moh Introduction to International Finance International Finance Topics National Income Accounts Governments measure 1 the value of exports and imports 2 the value of international financial capital 3 the measure of official settlements balance (the balance of payments): the balance of funds that central banks use for official international payments All three values are measured in the government’s national income accounts Young-Kyu Moh Introduction to International Finance International Finance Topics National Income Accounts Governments measure 1 the value of exports and imports 2 the value of international financial capital 3 the measure of official settlements balance (the balance of payments): the balance of funds that central banks use for official international payments All three values are measured in the government’s national income accounts Young-Kyu Moh Introduction to International Finance International Finance Topics Exchange Rates Exchange rates are also an important financial issue for most governments Exchange rates measure how much domestic currency can be exchanged for foreign currency They also affect how much goods that are denominated in foreign currency (imports) cost And they affect how much goods denominated in domestic currency (exports) cost in foreign markets Young-Kyu Moh Introduction to International Finance International Finance Topics Exchange Rates Exchange rates are also an important financial issue for most governments Exchange rates measure how much domestic currency can be exchanged for foreign currency They also affect how much goods that are denominated in foreign currency (imports) cost And they affect how much goods denominated in domestic currency (exports) cost in foreign markets Young-Kyu Moh Introduction to International Finance International Finance Topics Exchange Rates Exchange rates are also an important financial issue for most governments Exchange rates measure how much domestic currency can be exchanged for foreign currency They also affect how much goods that are denominated in foreign currency (imports) cost And they affect how much goods denominated in domestic currency (exports) cost in foreign markets Young-Kyu Moh Introduction to International Finance International Finance Topics Exchange Rates Exchange rates are also an important financial issue for most governments Exchange rates measure how much domestic currency can be exchanged for foreign currency They also affect how much goods that are denominated in foreign currency (imports) cost And they affect how much goods denominated in domestic currency (exports) cost in foreign markets Young-Kyu Moh Introduction to International Finance International Finance Topics Exchange Rates Exchange Rate Determination Relatively new part of international economics Working of fixed-rate system Which system, fixed or floating, is better? Modern theories of floating exchange rates Young-Kyu Moh Introduction to International Finance International Finance Topics Exchange Rates Exchange Rate Determination Relatively new part of international economics For much of past century, exchange rates were fixed by gov’t action rather than in the market place Before WWI: fixed in terms of gold After WWII: fixed in terms of the U.S. dollar Working of fixed-rate system Which system, fixed or floating, is better? Modern theories of floating exchange rates Young-Kyu Moh Introduction to International Finance International Finance Topics Exchange Rates Exchange Rate Determination Relatively new part of international economics Working of fixed-rate system Which system, fixed or floating, is better? Modern theories of floating exchange rates Young-Kyu Moh Introduction to International Finance International Finance Topics Exchange Rates Exchange Rate Determination Relatively new part of international economics Working of fixed-rate system Which system, fixed or floating, is better? Modern theories of floating exchange rates Young-Kyu Moh Introduction to International Finance International Finance Topics Exchange Rates Exchange Rate Determination Relatively new part of international economics Working of fixed-rate system Which system, fixed or floating, is better? Modern theories of floating exchange rates Young-Kyu Moh Introduction to International Finance International Finance Topics International Policy Coordination In an integrated world economy one country’s economic policies usually affect other countries as well How to produce an acceptable degree of harmony among the international trade and monetary policies of different countries Young-Kyu Moh Introduction to International Finance International Finance Topics International Policy Coordination In an integrated world economy one country’s economic policies usually affect other countries as well Differences in goals between countries often lead to conflicts of interest Coordination failure How to produce an acceptable degree of harmony among the international trade and monetary policies of different countries Young-Kyu Moh Introduction to International Finance International Finance Topics International Policy Coordination In an integrated world economy one country’s economic policies usually affect other countries as well How to produce an acceptable degree of harmony among the international trade and monetary policies of different countries Young-Kyu Moh Introduction to International Finance International Finance Topics International Policy Coordination In an integrated world economy one country’s economic policies usually affect other countries as well How to produce an acceptable degree of harmony among the international trade and monetary policies of different countries Cooperation on international trade policies is well established Coordination of international macroeconomic policies is a newer and more uncertain topic Young-Kyu Moh Introduction to International Finance International Finance Topics International Capital Market Functioning of global asset markets Balance of payment crisis Young-Kyu Moh Introduction to International Finance International Finance Topics International Capital Market Functioning of global asset markets Balance of payment crisis Young-Kyu Moh Introduction to International Finance