The Global Economy

Exchange Rate

The value of one currency expressed in terms of another.

Depreciation

Relative fall in the value of one currency against another.

Appreciation

Relative increase in the value of one currency against another.

Floating Exchange Rates

Decided purely by the forces of demand and supply in the forex. No government interventions.

Fixed Exchange Rates

An exchange rate system where the exchange rate is fixed to the value of another currency and maintained there with appropriate central bank interventions.

Revaluation

Relative rise in exchange rate within a fixed exchange rate system,

Devaluation

Relative fall in exchange rate within a fixed exchange rate system,

Gov. tools within fixed exchange rate systems

1) Adjustment of domestic interest rates 2) Use of foreign currency reserves

Fixed ER Adv/Disadv

Adv: 1) Reduces business uncertainty 2) Protects against inflation (as exports don’t impact AD as much) 3) Low ER can increase export competitiveness

Disadv: 1) Interest rates influence AD too 2) Foreign currency reserves may run out 3) Setting an artificial rate may hurt exports 4) Potential for intl disputes

Floating ER Adv/Disadv

Adv: 1) Doesn’t affect interest rates 2) In theory, balances current account balance 3) Removes need for large foreign currency reserves

Disadv: 1) Business uncertainty is high 2) Increased speculations can cause larger fluctuations

Managed Exchange Rates

The government intervenes in the market to alter the exchange rate periodically. Eg. Adjustable peg.

Balance of Payments

A record of all transactions between the residents of a country and residents of all other countries. Consists of current, capital, and financial accounts. In theory, the balance of payments should be 0 (credits = debits, deficits = surpluses, 0 = cur.a. + cap.a. + f.a.)

Current account

1) trade balance = balance of trades in goods + balance of trades in services 2) income flows (rents, interest, profits) 3) current transfers (gifts, remittances, foreign aid)

Capital account

1) capital transfers (eg. net debt forgiveness, non-life insurance claims, investment grants) 2) transactions in non-produced non-financial assets (purchase or use of natural resources that have not been produced eg. land)

Financial account

1) FDI 2) Portfolio investment (eg. stocks and bonds) 3) Reserve assets 4) Official borrowing

Persistent current account deficit

1) Depreciating exchange rate 2) Higher interest rates to attract FDI 3) Greater foreign ownership of domestic assets 4) Increased government debt 5) Poorer credit ratings 6) Lower long-term growth rate 7) Foregone future opportunities

Methods to correct persistent current account deficit

1) Expenditure reducing policy 2) Expenditure switching policy 3) SSPs

Persistent current account surplus

1) Lower domestic consumption 2) Insufficient domestic investment 3) Appreciation of domestic currency 4) Inflation 5) Employment (mixed results) 6) Reduced export competitiveness

Free Trade

Trade between countries when there aren’t barriers to trade put in place by government or international organizations.

Absolute Advantage

Country can produce more with same or less amount of resources compared to another country.

Absolute Advantage

Country can produce a certain good with a lower opportunity cost than another coutnry,

Types of Trade Protection

1) Tariffs 2) Quotas 3) Production Subsidies 4) Export Subsidies

Preferential Trade Agreements

Giving preferred access to certain imports from certain countries through lower protectionism. Can be bilateral or multilateral..

Trading Blocs

Group of countries that promote trade among themselves by reducing tariffs and other barriers. Coming together is referred to as integration.

Free Trade Areas (FTA)

Agreement between countries to trade freely with each other. (eg. USMCA)

Customs Union

Agreement between countries to establish common external barriers against non-members. (eg. EU)

Common Market

Agreement to move capital, labor, and goods & services freely between countries. (eg. Eu)

Monetary Union

Where two or more countries share the same currency and have a common central bank. (eg. Eurozone)

Economic Development

The multidimensional increase in the living standards within an economy, measured in terms of indicators such as GNI per capita, literacy rates, access to healthcare, etc.

Sustainable Development

An approach to developing or growing by using resources in a way that allows for them to renew or continue to exist for others. (Eg. using recycled materials)

Trade Strategies

1) Import Substitution 2) Export Promotion 3) Economic Integration 4) Diversification 5) Social Enterprise

Market-Based Policies

1) Privatization 2) Deregulation 3) Trade liberalization

Interventionist

1) Tax policies 2) Transfer Payments 3) Minimum wages

Provision of merit goods

1) Education, Healthcare, Infrastructure, Inward FDI

Foreign Aid

1) Humanitarian and Developmental Aid 2) Debt Relief 3) Official Developmental Assistance (ODA) 4) NGOs

Multilateral Developmental Assistance

1) Worldbank 2) IMF

Institutional Change

1) Improved access to banking 2) Women’s Empowerment 3) Reducing corruption 4) Property & Land Rights