International Balance of Payments: Introduction

Roberto ChangJanuary 2013

Welcome!

• International Macroeconomics is one of the most exciting and lively subjects in Economics

• Related to a host of important real world problems

• And some other that are not as obviously important, but instructive as well

A Nobel Prize “Problem”

Or, Why Even Nobel Prize winners should take this course

The Nobel Prize Tale

• The 2012 Nobel Prize in Economics was announced on Monday October 15, 2012

• The prize, 10 million Swedish krona, was awarded on Saturday, December 8th

• The winners: Alvin Roth (Harvard) and Lloyd Shapley (UCLA)

Why should even Roth and Shapley care about International Macro?

• Presumably (since they live in the US) Roth and Shapley do not care about kronas, but about US dollars.

• In other words, they must care about the value of kronas in US dollars: the exchange rate.

The krona-dollar exchange rate

• October 15, 2012: 1 US dollar = 6.70 kronas

• End of May: 1 US dollar = 7.26 kronas

The US dollar depreciated or became weaker against the krona.

The krona appreciated against the dollar.

The Nobel Award, in dollars

• October 15 (announcement date): 10,000,000 kronas/6.70 kronas per dollar = 1,492,537 dollars

• At May exchange rate: 10,000,000 kronas/7.26 kronas per dollar = 1,377,410 dollars

In the four months before the announcement, the dollar value of the prize increased by $ 115 126!!

What should Roth-Shapley have done?

• As you will learn in this course, it is possible to contract to purchase dollars for kronas at a given date in the future and at a fixed (e.g. locked in advance) rate

• The agreed upon rate is called a forward rate

• So RS could have “locked” the dollar value of their prize as soon as they learned they had won

Actually, why should they care?

• Why do we assume that Roth-Shapley care about the dollar value of the award, instead of the krona value?

• Answer: Presumably, the dollar prices of goods they care about are fixed in dollars, at least in the short run.

• The importance and implications of such nominal rigidities will be a substantial part of this course.

Course Content, Logistics, etc.

Contents

• A lot of interesting stuff

• Exchange Rates• Current Accounts and International Wealth• Currencies • Crises• And on and on…

But…

• …while this course is for you…

• …I expect you to work hard…

• …to learn and apply the technical apparatus needed to think about these problems as an economist

Prerequisites

• Intermediate Macro

• Econometrics

• And their prerequisites

• I will not refrain from derivatives, t-statistics, etc. if needed

Main Text

• International Macroeconomics by Rob Feenstra and Alan Taylor

• Second edition (2012)

• Excellent intro and useful web site

18 of 40Copyright © 2011 Worth Publishers· International Economics· Feenstra/Taylor, 2/e.

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The Global Macroeconomy

Additional text

• International Macroeconomics by Stephanie Schmitt Grohe and Martin Uribe

• Unpublished, current version 2013 (will be available from my web site)

• More technically advanced

Additional Readings

• I will feel free to assign any supplementary material, as events or class discussion warrant

• Relevant events happen every day!

• Make a habit of reading The Economist, FT, NY Times, WSJ… and relate what you learn here to their discussion

Formal Requirements

• Five homework sets

• First Midterm: March 11th

• Second Midterm: April 18th

• Final Exam: May 10th

Grades

• Homeworks: 10%

• If final grade is lower than the average of two midterms, each exam counts for 30% of grade

• If not, final is 50% and the best of midterms for 40%

• Hence, no make ups!

Office Hours, etc.

• My regular office hours: Thursdays 2:30-4:00, or by appointment

• Announcements, materials, etc. will be posted in my web page

Next Class

• Please read chapters 1 and 2 of FT