Introduction to Economics
International Finance
Distribution of Income
Recession began in April, 2001
Employment in Millions,
Seasonally adjusted
Source:http://www.dismal.com/
The Dismal Scientist’s Site
What is the Greatest Threat to
International Stabilty?
• Political: Terrorism
• Economic: International Monetary Crisis
– cause: speculative bubble in high growth rate
economies
– trigger: currency speculators trying to
destabilize the currency
– problem: capital flight
– target country defense: sufficient foreign
currency reserves
– international defense: International Monetary
Fund loans
An Example of an International
Financial Crises
• East Asian Crisis
Thailand in 1997
• Production down
source:
Business Week
11-17-97
– Toyota shuts down 2 large factories in Bangkok
• Banks hold bad loans
– speculation in golf courses, condos, high rises
• West worries: potential Intl. financial crisis
• International Monetary Fund: bailout loans
– Indonesia: $10 B
• US Treasury pledges $3B
– Thailand: $22 B
– Philippines: $1B
– South Korea: $40B
Problems
• Potential instability is associated with bad
investments in growing countries
• trigger could be speculation against a
currency if authorities hold insufficient
currency reserves
• Only international mechanism for
stabilization is cooperation among countries
and central banks
Changing Scenario in Asia
Four Tigers: Hong Kong, Taiwan,
Singapore, South Korea
Thailand and Neighbors: China,
Malaysia, Indonesia
Source: Economic Report of the President ,
1997
source: CIA
Date
source: Federal Reserve Bank of St. Louis
1997.09
1996.11
1996.01
1995.03
1994.05
1993.07
1992.09
1991.11
1991.01
1990.03
1989.05
1988.07
1987.09
1986.11
1986.01
1985.03
1984.05
1983.07
1982.09
1981.11
1981.01
Rate
T hailand Exchange Rate: Bahts Per Dollar, 1981-1997 .
40
35
30
25
20
15
10
5
0
Capital Flight
1. foreigners sell their Thai investments
2. foreigners exchange their Baht proceeds for say dollars
3. Demand for dollars shifts and price of the dollar in Bahts rises
demand for dollars
supply of dollars
Bahts per US $
quantity of dollars
Date
source: Federal Reserve Bank of St. Louis
1997.09
1996.11
1996.01
1995.03
1994.05
1993.07
1992.09
1991.11
1991.01
1990.03
1989.05
1988.07
1987.09
1986.11
1986.01
1985.03
1984.05
1983.07
1982.09
1981.11
1981.01
Rate
T hailand Exchange Rate: Bahts Per Dollar, 1981-1997 .
40
35
30
25
20
15
10
5
0
Capital Flight
4. Thai authorities could use their Dollar Reserves to buy Bahts,
stabilize the x-ch rate, but they may have used those $ to buy
capital goods to support growth
demand for dollars
supply of dollars
Bahts per US $
quantity of dollars
Source: Yardeni
Source: http://interactive.wsj.com
Source: Yardeni
‘94 Exports:
Manufactures: 73%
Partners: US 21%
Japan 17%
Capital Flight: Can tell the story in either currency
1. foreigners sell their Thai investments
2. foreigners exchange their Baht proceeds for dollars
3. Supply of Bahts shifts and the dollar price of the Baht falls
demand for Bahts
supply of Bahts
dollar price of Baht
quantity of Bahts
Currency Speculators can
Trigger a Crisis
• For example, currency speculators could
sell Bahts, trying to drive the price down,
guessing that the Thai authorities did not
have sufficient foreign currency reserves to
buy Bahts, and defend their currency
• In 1997, the speculators tried to destabilize
Hong Kong, but the authorities had large
reserves of foreign exchange and the
speculators failed
Currency Speculators: A destabilizing influence
1. Currency speculators sell their Bahts driving the Baht down
2. If the Thai authorities do not have sufficient dollar reserves to
buy Bahts, they can not defend the currency
demand for Bahts
supply of Bahts
dollar price of Baht
quantity of Bahts
Thailand Economy
Source: World Factbook
overview:
After enjoying the world's highest growth rate from
1985 to 1995 - averaging almost 9% annually increased speculative pressure on Thailand's
currency in 1997 led to a crisis that uncovered
financial sector weaknesses and forced the
government to float the baht. Long pegged at 25 to
the dollar, the baht reached its lowest point of 56
to the dollar in January 1998 and the economy
contracted by 10.2% that same year. Thailand
entered a recovery stage in 1999, expanding 4.2%
and grew about the same amount in 2000, largely
due to strong exports - which increased about 20%
in 2000. An ailing financial sector and the slow
pace of corporate debt restructuring, combined
with a softening of global demand, is likely to slow
growth in 2001.
Could the US, as a Debtor
Nation, Have a Problem?
• To finance our excess imports of goods and
services, we sell securities to foreigners
• As a consequence, we are leveraged by this
debt
Link Between Government
Deficits and Trade Deficits
• US Govt. runs a deficit
– citizens don’t want higher taxes
• US Treasury finances deficit by selling treasuries
– US citizens & institutions buy in primary market
– foreign citizens & institutions buy in primary market
• Why do foreigners invest in US?
– politically stable country
– may be attracted by:
• low US inflation rate
• high US interest rate ( when they are high!)
Central Bank Responsibilities: Domestic and Foreign
US Govt
Deficit
Treasury
Issues Bonds
Federal
Reserve
Foreigners
Buy Bonds
Foreign Concern
with US Inflation
Foreign Concern
with US Interest
Rates
Capital Flight
1. foreigners sell their US securities
2. foreigners exchange their US $ proceeds for Yen
3. Supply of dollars shifts and price of the dollar falls
demand for $
supply of $
Yen price of US $
quantity of $
4. Federal Reserve may use its Yen Reserves to buy $, stabilize
x-ch rate
Ja
n99
M
ar
-9
9
M
ay
-9
9
Ju
l-9
9
Se
p99
N
ov
-9
9
Ja
n00
M
ar
-0
0
M
ay
-0
0
Ju
l-0
0
Se
p00
N
ov
-0
0
Ja
n01
M
ar
-0
1
M
ay
-0
1
Ju
l-0
1
Se
p01
Rate
Exchange Rate: US Dollars Per Euro
1.4
1.2
1
0.8
0.6
0.4
0.2
0
Date
US Dollar and other Currencies, 1988-96
Source: Handbook of International
Economic Statistics
Real Long Term Interest Rates
Real rate = nominal rate minus
expected rate of inflation
Summary-Vocabulary-Concepts
•
•
•
•
Japanese Yen
Thailand Baht
capital flight
devaluation
Outline: Lecture Sixteen
• The Distribution of National Income by
Input Factor Shares
• The Distribution of Personal Income
• Trends in US Income Inequality
• Poverty
National Income 1996
Corporate Profits
Rental Income11%
Net Interest
7%
2%
Proprietor's Income
9%
Employee
Compensation
71%
source: Lecture Six
US National Income: Factor Shares, 1929-1965
.
Rent to Persons
Net Interest
100%
Corporate Profits
80%
Proprietor’s Income
40%
Employee Compensation
2/3
capital, land, entrepreneurship
1/3
20%
Year
65
63
61
59
57
55
53
51
49
47
45
43
41
39
37
35
33
31
0%
29
Percent
60%
• If workers are paid a real wage equal to
their marginal product of labor,
• and other factors of production are paid
their marginal product of production,
• does not everybody get their just desserts?
Defense of the Status Quo
•
•
•
•
If the economy has constant returns to scale,
If labor is paid its marginal product,
If capital receives its marginal product,
Income paid to labor & capital = output
• Everybody is paid what they are worth and
there is no exploitation
• MERITOCRACY
Variation of Personal Income
• The Distribution of Income
– California Income 1993
• Number of tax returns by adjusted gross income
(AGI) class
– US Income
California: Adjusted Gross Income, 1993 Tax Year
.
300000
250000
150000
100000
50000
Adjusted Gross Income
Source: California Statsitical Abstract
.
30000
28000
26000
24000
22000
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
0
Number
200000
California: Number of Returns by Adjusted Gross Income,
T ax Year 1993
.
3000000
2500000
1500000
1000000
500000
Adjusted Gross Income
.
100000
90000
80000
70000
60000
50000
40000
30000
20000
0
10000
Number
2000000
CA AGI, Frequency & Cumulative Frequency
Income Number Frequency Cumulative
< 10,000 2727672
22.86%
22.86
10-20,000 2440167
20.45%
43.31
20-30,000 1802873
15.11%
58.42
30-40,000 1305679
10.94%
69.36
-50,000 997933
8.37%
77.73
-100,000 2107160
17.66%
95.39
-150,000 323390
2.71%
98.10
-200,000 102863
0.86%
98.96
-300,000 70848
0.59%
99.55
-400,000 23982
0.20%
99.75
Distribution of Adjusted Gross Income, California .
0.25
0.15
0.1
0.05
Income
100000
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
0
Frequency
0.2
Income
1000000
500000
400000
300000
200000
150000
100000
90000
80000
70000
60000
50000
40000
35000
30000
25000
20000
15000
10000
5000
Probability
Cumulative Distribution of California Adjusted Gross Income
.
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
US Family Income 1995
I nco me G r o u p
A ver a ge I n c ome
L o west 2 0%
$ 8032
Se c o n d 2%0
$ 17916
T hir d 2 0 %
$ 28965
Fo u rth 2 0 %
$ 43930
Hig h est 2 0 %
$ 73058
Measures of Income Inequality
• Lorenz Curve
– What % of Population Has What % of Income
• Gini Coefficient
– range: 0, meaning equal, to 1, meaning unequal
• Examples
– socialist ideal: equality
– life as a crap shoot: any income is equally likely
Benchmark: Frequency Distribution for Equal .
0.1
0.09
0.08
Frequency
0.07
0.06
0.05
0.04
0.03
0.02
33000
0.01
0
0
20000
40000
60000
Income
80000
100000
Equal Distribution of Income
% Population % Income
0
0
20
20
40
40
60
60
80
80
100
100
Lorenz Curve: Equal Distribution of Income
.
120
100
% Income
80
60
40
20
0
0
20
40
60
% Population
80
100
120
Benchmark: Frequency Distribution for Uniform
.
0.01
0.009
0.008
Frequency
0.007
0.006
0.005
0.004
0.003
0.002
0.001
0
0
20000
40000
60000
Income
80000
100000
Uniform Distribution of Income
Cumulative Frequency for Uniform Distribution
1
% Population % Income
0
0
20
4
40
16
60
36
80
64
100
100
.
0.8
Probability
0.6
0.4
0.2
7000
14000
21000
28000
35000
42000
49000
56000
63000
70000
77000
84000
91000
98000
0
0
Income
Lorenz Curves: Equal and Uniform Distributions
.
120
100
% Income
80
60
40
Equal
Uniform
20
0
0
20
40
60
% Population
80
100
120
Gini Coefficient = A/(A+B)
Lorenz Curve for Uniform Distribution
.
100
% Income
80
60
40
B
20
0
0
20
40
60
% Population
80
100
US Family Income, 1994
% Families % Income
0
0
20
4.2
40
14.2
60
29.9
80
53.2
95
79.9
100
100
Lorenz Curve: United States Families, 1994
.
120
100
% Income
80
60
40
Equal
Uniform
Family
20
0
0
Source: US Statistical Abstract
20
40
60
% Families
80
100
120
Frequency Distribution for the Exponential
. .
Cumulative Frequency for Exponential
0.03
.
1
0.9
0.025
0.8
Probability
0.7
0.015
0.01
0.6
0.5
0.4
0.3
0.005
0.2
0.1
95000
% POP
0
0.00467884
0.0175231
0.02649902
0.06155194
0.09020401
0.17335853
0.26424112
0.4421746
0.59399415
0.80085173
0.90842181
1
100000
95000
90000
85000
80000
75000
70000
65000
60000
55000
Lorenz Curve: Exponential Distribution
.
1
0.9
0.8
0.7
Percent Income
0.09516258
0.18126925
0.22119922
0.32967995
0.39346934
0.52763345
0.63212056
0.77686984
0.86466472
0.95021293
0.98168436
50000
Income
% Income
0
45000
40000
35000
30000
25000
20000
15000
10000
Income
5000
0
0
90000
85000
80000
75000
70000
65000
60000
55000
50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
0
Frequency
0.02
0.6
0.5
0.4
0.3
0.2
0.1
0
1
0
0.2
0.4
0.6
Percent Population
0.8
1
Distribution of Adjusted Gross Income, California .
0.25
0.15
0.1
0.05
Income
100000
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
0
Frequency
0.2
Why is Income Distributed So
Unevenly?
• Labor Income is Unevenly Distributed
• Part-time work
– less than 50 weeks per year
– less than 36 hours per week
“A rising tide lifts all boats”,
JFK
• Economic growth may make everbody
better off
– increases the size of the pie
• but the rich may get a larger share of the bigger pie
• It is possible that the rich get richer and the
poor get poorer
Income Distribution and GDP Per Capita
Source: United Nations Development Programme, Human Development Report, 1993
Country
GDP Per Income Share: Gini
Capita, Lowest 40%, Coefficient
1990*
Families
Singapore
Hong
Kong
Malaysia
Mexico
Brazil
Jamaica
Honduras
$15,580
$15,595
15%
16.2%
0.42
0.45
$6,140
$5,918
$4,718
$2,979
$1,470
13.9%
0.48
0.50
0.57
0.66
0.62
* purchasing power parity
8.1%
15.3%
The Distribution of Income and Growth
0.7
Jamaica
0.6
Brazil
Honduras
Mexico
Hong Kong
Gini Coefficient
0.5
Malaysia
0.4
Singapore
0.3
0.2
0.1
0
0
2000
4000
6000
8000
10000
GDP Per Capita, 1990
12000
14000
16000
18000
.
Lorenz Curves: US Famiy Income, 1970, 1980, 1994
.
100
90
80
% Income
70
60
50
40
30
1970
1980
1994
20
10
0
0
20
40
60
% Families
80
100
US Family Income: Lorenz Curves .
100
90
1970
1980
1994
1999
80
Income Percent
70
60
50
40
30
20
10
0
0
20
40
60
Population Percent
80
100
T rends in Shares of US Family Income .
60
Top 5 %
Top 20 %
Bottom 40%
50
30
20
10
Year
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
0
1970
Percent
40
Trends In US Median Family Income, 1994 $
.
45000
40000
35000
1994 $
30000
25000
20000
15000
10000
5000
0
1970
1975
1980
1985
Year
1990
1995
Why has income become more
unevenly distributed?
• Standardize on Male Full-Time YearAround Workers
• Ability Premium
– 90 percentile: $70314 for 1995 males
– 50 percentile: $31497
– 10 percentile: $12920
• Education Premium
– college grads gain relative to high school grads
• Experience Premium
– older workers gain relative to younger workers
Earnings Ratios for Male High School Graduates
.
2.5
2
Ratio
1.5
1
90/50 ratio
50/10 ratio
0.5
Year
Source: Economic Report of the President, 1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
0
Ratio of Median Earnings, Males: College Grad to High School Grad
Source: Economic Report of the President, 1997
Ratio of Median Earnings, Males: Age 45-54 to 25-34
Source: Economic Report of the President, 1997
Growing Wage Differentials Between the Less Skilled and More Skilled:
Less Demand for Less Skilled and More Demand for the More Skilled
Source: Economic Report of the President, 1997
Rich Are Getting Richer
• smart are getting richer
• educated are getting richer
• experienced are getting richer
• Should we worry about the dull, the
ignorant, the young and inexperienced?
Poverty in the US
• US Government Definition of Poverty
– Subsistence wage: $15141 in 1994
• a non-farm family of four
• cost of inexpensive but nutritious food times 3
– assume food is 1/3 of budget
• Trends in Poverty
• Incidence of Poverty
– elderly
– children/families headed by single women
– rural
Incidence of Poverty Among the Aged and the Young
Children: 14.9% in 1970 to 21.2% in 1994
Source: Economic Report of the President, 1997
Percentage of Births Occuring Out of Wedlock, .
White Women by Age Group, US
.
35
30
Percent
25
15-19
20-24
25-29
20
15
10
5
0
1955
1960
1965
1970
Year
1975
1980
Percentage of Births Occurring Out of Wedlock, .
Black Mothers By Age Group, US
90
80
70
15-19
20-24
25-29
Percent
60
50
40
30
20
10
0
1955
1960
1965
1970
Year
1975
1980
US Families Headed By Women in Percent
.
45
40
35
White
Black
Percent
30
25
20
15
10
5
0
1940
1950
1960
Year
1970
1983
Marriage and Divorce Rates Per 1000 Population, US
.
12
10
Marriages
Divorces
6
4
2
Year
1992
1989
1986
1983
1980
1977
1974
1971
1968
1965
1962
1959
1956
1953
0
1950
Rate
8
US Marrige Rates Per 1000 Population, .
Unmarried Women 15-44 Years Old
160
140
120
80
60
40
20
Year
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
0
1970
Rate
100
Summary-Vocabulary-Concepts
• input factor shares
• distribution of
personal income
• distribution of family
income
• frequency distribution
of income
• cumulative
distribution of income
• Lorenz curve
• Gini coefficient
• median family income
• part-time, part-year
worker
• full-time, full-year
worker
• within group variation
in earnings
• ability differential
• between group
variation in earnings
• education differential
• experience differential
• definition of poverty