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International topics june 2010
The document discusses macroeconomics in the global context. It covers how macroeconomics looks at the overall economic environment and key factors like output, money, and expectations that impact macroeconomic conditions. It also discusses how macroeconomics examines global economic forces, particularly balance of payments and exchange rates, and how these factors impact the global economic environment.
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International topics june 2010
- 1. Macroeconomics: The Global Context Robert A. Gough, Jr., Ph.D. Proprietary and Confidential - G-enovation, Inc. - © 2009 1
- 2. Macroeconomics Is about theoverall economic environment …How it works as a whole …How: (1) Output GDP = C + I + G + (Ex – M) (2) Role of Money (3) Expectations …impact and determine Macroeconomic conditions Proprietary and Confidential - G-enovation, Inc. - © 2009 2
- 3. Macroeconomics The GlobalContext is about… • Trade flows • Income flows • People flows Tariffs…Quotas…Terms of trade …Dumping…Protectionism …Trade zones…Exchange rates…Balance of payments… IMF…World Bank…World currency…Purchasing power parity…Current account…Capital account… Proprietary and Confidential - G-enovation, Inc. - © 2009 3
- 4. International Finance Proprietary and Confidential - G-enovation, Inc. - © 2009 4
- 5. International Finance Balance ofPayments… …a close cousin to GDP accounting • GDP Account = reports a nation’s output and its component parts • BOP Statement = records a nation’s cross-border transactions Proprietary and Confidential - G-enovation, Inc. - © 2009 5
- 6. International Finance As ina GDP account…all numbers in a Balance of Payments Statement are flows… …indicating the value of: • Exports and Imports • Income Receipts and Payments • New Foreign Borrowing or Lending …over a particular period of time…like a year. Proprietary and Confidential - G-enovation, Inc. - © 2009 6
- 7. International Finance A Balance of Payments Statement Current Account • Balance on Trade of Goods & Services • Balance on Merchandise Trade (Goods) • Balance on Trade in Services • Net Income (Net Factor Receipts) • Net Unilateral Transfers Proprietary and Confidential - G-enovation, Inc. - © 2009 7
- 8. International Finance A Balance of Payments Statement Capital and Financial Account • Net Capital Account • Financial Account • Net Foreign Direct Investment • Net Portfolio Flows • Other Capital Flows, Net • Change in Official Reserves • Errors and Omissions (Statistical Discrepancy) Proprietary and Confidential - G-enovation, Inc. - © 2009 8
- 9. International Finance A Balance of Payments Statement …is very revealing …offers a unique window on a country’s cross border transactions …summarizes a country’s relationship to the global economy • It tells a story… …just like your personal checkbook …and your library Proprietary and Confidential - G-enovation, Inc. - © 2009 9
- 10. International Finance Proprietary and Confidential - G-enovation, Inc. - © 2009 10
- 11. International Finance Proprietary and Confidential - G-enovation, Inc. - © 2009 11
- 12. International Finance Proprietary and Confidential - G-enovation, Inc. - © 2009 12
- 13. International Finance Proprietary and Confidential - G-enovation, Inc. - © 2009 13
- 14. International Finance Proprietary and Confidential - G-enovation, Inc. - © 2009 14
- 15. International Finance Proprietary and Confidential - G-enovation, Inc. - © 2009 15
- 16. International Finance A Balance of Payments Statement Some explanations…Capital & Financial Account “Financial Account”… “Changes in official reserves” = reflect increases/decreases in the government’s stockpile of gold and foreign currencies. “Errors & Omissions” = residual category reflecting statistical discrepancies in compiling BOP data. Proprietary and Confidential - G-enovation, Inc. - © 2009 16
- 17. International Finance Proprietary and Confidential - G-enovation, Inc. - © 2009 17
- 18. International Finance Exchange Rates… …strongly affected by: (1) A country’s current account balance…trade balance Logic: • If consumer demand for foreign products rises… • A country’s current account balance deteriorates… • …and its currency depreciates • Because higher demand for foreign products bids up price of foreign currencies needed to buy them Proprietary and Confidential - G-enovation, Inc. - © 2009 18
- 19. International Finance Exchange Rates… “Sustained current account deficits are more typically associated with long-term currency depreciation than with long-term appreciation.” Proprietary and Confidential - G-enovation, Inc. - © 2009 19
- 20. International Finance Exchange Rates… …strongly affected by: (2) A country’s inflation…purchasing power parity Logic: • If a country experiences consistently higher inflation… • A country’s current account balance deteriorates… • …and its currency depreciates • Because…rising prices for a country’s products reduces demand for those products. Proprietary and Confidential - G-enovation, Inc. - © 2009 20
- 21. International Finance Exchange Rates… Relationship between inflation and exchange rates viewed through “purchasing power parity”…. • The Law of One Price • The “Big Mac Index” criteria …A unit of currency ($) should always have the same purchasing power in one country as another. …Inflation undermines this parity. Proprietary and Confidential - G-enovation, Inc. - © 2009 21
- 22. International Finance Exchange Rates… …strongly affected by: (3) A country’s interest rates …regarded by currency traders as the single most powerful driver of exchange rates…in short run. Logic: • Higher interest rates attract foreign capital… • …driving up the value of a country’s currency Proprietary and Confidential - G-enovation, Inc. - © 2009 22
- 23. International Finance Exchange Rates… Regardless of other models and observations… Law of One Price – “uncovered interest rate parity” A country’s currency tends to appreciate after a rise in its interest rates…and to depreciate after a fall. Proprietary and Confidential - G-enovation, Inc. - © 2009 23
- 24. International Finance Making Sense of Exchange Rates… • It’s difficult…! • Most important lesson: currency markets are unpredictable… • …and irrational “Ask 10 traders…likely get 10 different explanations!” Proprietary and Confidential - G-enovation, Inc. - © 2009 24
- 25. International Finance Making Sense of Exchange Rates… But… …exchange rates are still subject to basic pressures of supply and demand. • Exchange rate is the price of one currency in terms of another…like products! • What raises the demand for a currency creates pressure for appreciation…and vice versa Proprietary and Confidential - G-enovation, Inc. - © 2009 25
- 26. International Finance Making Sense of Exchange Rates… Examples: • Surge in American demand for foreign goods or financial assets…will weaken the dollar. • Burst of European inflation…will weaken the euro…and strengthen the dollar. • Unexpected increase in British interest rates… would strengthen the pound. Proprietary and Confidential - G-enovation, Inc. - © 2009 26
- 27. International Finance Making Sense of Exchange Rates… Reason why exchange rates are difficult to predict… • Currencies are subject to a myriad of pressures at the same time. Ups and downs in aggregate demand…currency interventions by governments…interest rate movements…inflation…financial panics…political crises…oil shocks…new technologies…abrupt changes in expectations…etc. Proprietary and Confidential - G-enovation, Inc. - © 2009 27
- 28. International Finance Making Sense of Exchange Rates… Upshot…Rules of Thumb…Best Predictors: (1) Interest rates – for short-term movements …interest rate increases ► rapid appreciation (2) Inflation – for medium-term movements …high inflation ► depreciation (3) Current account imbalances – for longer-term movements …deficits ► depreciation Proprietary and Confidential - G-enovation, Inc. - © 2009 28
- 29. Macroeconomics Is about theoverall economic environment …How it works as a whole …How: (1) Output GDP = C + I + G + (Ex – M) (2) Role of Money (3) Expectations …impact and determine Macroeconomic conditions Proprietary and Confidential - G-enovation, Inc. - © 2009 29
- 30. Macroeconomics – TheGlobal Context Is about the global economic environment: ...How various forces ...Summarized by: (1) Balance of Payments (2) Exchange Rates …impact and determine global economic conditions Proprietary and Confidential - G-enovation, Inc. - © 2009 30