Оглавление
Topic 1. International economics: globalization and internationalization............................................................... 1
The state of globalization in 2022 (HBR): ............................................................................................................... 4
The tricky restructuring of global supply chains: ................................................................................................... 5
Topic 2. Economic growth and International trade.................................................................................................... 5
TRADE IN BALANCE .............................................................................................................................................. 13
WHY OPEN MARKETS MATTER ......................................................................................................................... 13
Topic 3. Formulation of national trade policy ........................................................................................................... 13
Topic 4. The International Monetary System & Balance of Payments ................................................................. 20
GLOBAL CLASSROOM .............................................................................................................................................. 27
Topic 1. International economics: globalization and internationalization.
International economy
- a system of economic relations between
individual countries or groups of countries
Main participants:
 National economies
 Groups of countries
 International organizations
International business
a system of business relations between actors from
more than one country
Main participants:
 Multinational companies (MNC, MNEs,)
 Small and medium enterprises (SMEs)
 Individuals
 Non-governmental organizations
Globalization
Globalization - The movement of national economies towards their increasing integration and
interdependence (Hill, 2007)
Internalization - The process of increasing involvement of companies in international activities (Процесс
освоения внешних структур, в результате которого они становятся внутренними регуляторами)
+:
 Market growth: Economy of scales in production, R&D expenses, intangible assets etc; Reduction
of risk because of geographical diversification; Tax optimization
 Access to resources: Using cheap international resources and и building global value chain
 Expanding the range of products sold domestically: Acquisition of experience in conducting
operations in the context of a diverse external environment
ASPECTS:
Cultural & geographical g: reduction of time and space through the development of new technologies and
transport
Economic g: increasing interdependence of national economies and a trend towards greater integration of
goods, labor and capital markets
Institutional g: dissemination (распространение) of the same institutional settings around the world
Political g: political integration blocks
PREMISES (предпосылки)
Political:
 Reducing trade’s and investment's barriers


WTO / GATT
Integration blocks
Technological:
 Internet and IT technologies development
 Transportation development
 Communication technologies development
GLOBALIZATION WAVES
1870-1914 Colonies; reducing tariffs, transport development
1945-1980 Cooperation between countries, reduction of transport costs. Inequality between developed and
developing countries
1980 – to present Some developing countries have integrated into world processes, while others have
remained behind; the flow of capital drastically increased; "international outsourcing" (привлечение
внешних ресурсов)
PROS AND CONS:
Prons:
Cons:
1. Cross-cultural exchange
2. Economic growth
3. Exchange of new
technologies, innovations
4. Access to global
markets for poor countries
5. A chance for countries
to specialize in something
they do best (agriculture,
production, etc. )
6. Cost reduction by using
cheap labor
7. Competition between
countries is higher
1. Weakening of the role of
the country's own culture
2. Economical
interdependence
3. Higher competition for
smaller/local businesses
4. Less political freedom
5. Cheapening of labor
Dependence on foreign markets;
Political conjuncture;
Membership in international organizations and
fulfillment of obligations assumed;
Increase in the risks associated with doing
business…
Negative aspects of globalization effects on international business
 Dependence on foreign markets;
 Political conjuncture;
 membership in international organizations and fulfillment of obligations assumed;
 increase in the risks associated with doing business…
GLOBALIZATION THREATS:
• The Stolper-Samuelson Theorem: Under free trade, a factor heavily used in the production of a good
which price is rising receives a higher reward than a factor used in the production of a good which price is
falling. (S-S theorem in other words: well-educated they get more, who works on factory get less. In
Вьетнам workers who produce clothes get good salary, but it is no work for well-qualified specialists)
• In developed countries, low-skilled workers lose, in developing countries, highly skilled workers.
• The share of international trade is not large enough to affect wages so much
• Prices do not always behave as the theorem suggests, since there should be a redistribution of labor
between industries, but this does not happen.
• Globalization and international trade alone cannot be the main cause of world inequality
Developing countries loose because
Counterarguments
• «export pessimism» (if all developing countries
export non-technological (ex: natural resources)
goods, then prices will fall)
• Weak bargaining position (thus low wages, poor
conditions).
• Unequal distribution of wealth
• Exports from developing countries are only a
small part of world exports, which cannot affect
prices
• In foreign companies, salaries and working
conditions are better than in local ones
• Weak institutions and protectionism
The world economic pyramid:
PERSPECTIVES ON GLOBALIZATION
DHL global connectedness index:
Some results:
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The average distance over which countries trade has remained unchanged since 2012.
Global dataflow for 2018 does not indicate a major shift from globalization to regionalization.
Digital technologies are changing information flows. However, after almost two decades in which the
growth of cross-border communications far outpaced that of domestic communications, both now
appear to be expanding at a similar pace.
While the world is more connected than at almost any previous point in history, international flows
are far less than most people realize.

Most of the business is still carried out within the country, and not abroad.
1. The word is flat – we can live the same life, use same devices ad live like neighbors, culture is
common and so on.
1.0 Globalization: countries
2.0 Globalization: companies
3.0 Globalization: people
2. The word is not flat/ it’s regional
There are some globalized things but only in specific regions like unions and blocks
3. The word is diverse:
We are still all diverse. Own policy, culture, economical peculiarities
4. The world is partly flat:
There are still countries that are not integrated in the world globalization
Globalization VC regionalization: CAGE distance:
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Cultural
Administrative
Geographical
Economic
Four futures for economic globalization (world economic forum):
How international business differs from local (domestic) business?
 International sales
 International assets
 International management
 International owners
 International resources in production
The state of globalization in 2022 (HBR):
As companies contemplate adjustments to their global strategies, it is important to recognize how much
continuity there still is even in a period of wrenching change. The idea of a world where economic efficiency
alone drives patterns of international flows was always a myth. Globalization has always been an uneven
process, with cross-country differences and international conflicts significantly dampening international
flows. That’s a big part of why — even before the present crisis in Ukraine — only about 20% of global
economic output ended up in a different country from where it was produced. As the landscape shifts,
global strategies must be updated, but managers should avoid the costly overreactions that tend to follow
major shocks to globalization.
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Trade Flows: The main reason trade roared back so decisively, despite disruptions to global supply chains,
was a surge in demand for traded goods; In contrast, consumer spending on services (many of which require
in-person contact and are less tradable than goods) was down 2% over the last two years; The war in
Ukraine is exacerbating supply constraints and boosting inflation. The consequences are especially severe for
food and fuels, key exports from Russia and Ukraine; If demand shifts back from goods to services, that
would also reduce trade growth. Meanwhile, expect faster growth in the dollar value of world trade, which is
boosted by high commodity prices.
Capital Flows: The war could cut global GDP growth over the next year by more than one percentage point,
and FDI tends to suffer during periods of slower growth, as companies focus on defending their current
markets rather than expanding into new ones; Portfolio flows plummeted and recovered even faster than
FDI at the beginning of the pandemic. But the war in Ukraine has caused a predictable — but still modest —
pullback of portfolio investment from emerging markets.
Information flows: International data flows surged as the pandemic sent in-person interactions online. The
annual growth rate of international internet traffic roughly doubled in 2020. But that was just a one-time
spike. International data flows are still growing, but they grew more slowly in 2021 than in 2019; Looking
forward, the globalization of information flows is clouded with an especially high level of uncertainty. Major
economies are adopting very different approaches to regulating international data flows, with the potential
to add substantial frictions. And as international data flows surged during the pandemic, so did cybersecurity
threats.
People flows: International flows of people have been restricted severely during the Covid-19 pandemic,
due to their potential to transmit the virus and its variants; The number of people living outside their birth
countries increased by about two million in 2020, but that was 27% less growth than the UN projected
before the pandemic. The war has caused a spike in people moving across national borders involuntarily
The tricky restructuring of global supply chains:
Сложная реструктуризация глобальных цепочек поставок
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After the Berlin Wall fell in 1989, the lodestar of globalisation was efficiency. Companies located production
where costs were lowest, while investors deployed capital where returns were highest. Governments
aspired to treat firms equally, regardless of their nationality, and to strike trade deals with democracies and
autocracies alike.
Problems: First, some lean supply chains are not as good value as they appear: mostly they keep costs low,
but when they break, the bill can be crippling. The second problem is that the single-minded pursuit of cost
advantage has led to a dependency on autocracies that abuse human rights and use trade as a means of
coercion.
One indication that companies are shifting from efficiency to resilience is the vast build-up in precautionary
inventories
The danger is that a reasonable pursuit of security will morph into rampant protectionism, jobs schemes and
hundreds of billions of dollars of industrial subsidies. The short-term effect of this would be more volatility
and fragmentation that would push prices yet higher
Governments and firms must remember that resilience comes from diversification, not concentration at
home.
Topic 2. Economic growth and International trade

Developed countries: developed system of institutions, laws, rights, less corruption
Emerging countries: Brazil, India, China, Vietnam
DEFINITIONS
Trade is voluntary exchange of goods, services, assets, or money between people or organizations
International trade - trade between residents of different countries
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Export – sale of goods or services to foreign countries
Import - buying goods or services from other countries
Total trade = export + import
Trade balance = export VS import
Trade deficit - an economic condition in which a nation imports more than it exports (USA)
Trade surplus – an economic condition in which a nation exports more than it imports (China,
Russia, Germany)
SOCIAL WELFARE (социальное благосостояние)
Prices increase  consumer
surplus decrease
Supply increase  producer
surplus increases
Prices decrease  consumer
surplus increase
More goods  opportunity for
suppliers decrease  some
suppliers have to leave
PRODUCTION POSIBILITY
If we produce everything at home we will be only inside of triangle
INTERNATIONAL TRADE AND SPECIALIZATION
ADVANTAGES OF INTERNATIONAL TRADE
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Specialization and trade allow a country to go beyond its productive capacity
Global Efficiency (Large country is hard to specialize on one area of production. For Small countries
it is easier)
Prices are falling
Low-income households/families benefit the most (Low-income family can get cheaper prices.
People are getting out of the poverty)
Trade stimulates the development of economic activity (Development by competition -> innovations)
Increases competitiveness
WHY COUNTRIES CONTINUE TO MAINTAIN INEFFICIENT PRODUCTION AND PREVENT THE
IMPORT OF CHEAPER PRODUCTS FROM FOREIGN COUNTRIES?
-
To develop local production
To decrease dependence on other countries
Cultural aspect
CAN INTERNATIONAL TRADE BE HARMFUL?
 Both countries benefit from international trade, but there are certain groups within the country that lose
 In importing countries, producers lose their profits while consumers gain
INTERNATIONAL TRADE THERORIES
CLASSIC TRADE THEORIES
Early theories based on country
characteristics
• Focus on a single country
• Good in explaining trade with
resources
• Price is an important aspect of
the decision to buy
Modern theories based on firm characteristics
• Focus on a role of firm in international trade
• Good in explaining trade with non-resource goods and services
• Brand is an important aspect of the decision to buy
BASED ON FIRM’S CHARACTERISTICS
• The increasing importance of MNCs (multinational corporation) in
the post-war period of international economic development
• Failure of country advantage theories to explain some aspects of
international trade
• The lack of evidence for some theories (for example, the Factor
Endowment theory and the Leontief paradox)
DEVELOPMENT OF INTERNATIONAL TRADE THEORIES
! Country-level theories don’t explain why countries produce specific categories of goods, so different
theories appeared

Inter-industry trade is a trade of products that belong to different industries. For instance, the trade
of agricultural products produced in one country with technological equipment produced in another
country can be classified to be an inter-industry trade. Countries usually engage in inter-industry
trade according to their competitive advantages
Intra-industry trade, on the other hand, is a trade of products that belong to the same industry. As it
has been noted, “intra-industry trade (IIT), that is trade of similar products, has been a key factor in
trade growth in recent decades. These trends have mostly been attributed to the fragmentation of
production (outsourcing and offshoring) as a result of globalisation and new technologies
Main points
MERCANTILISM
 State wealth – gold or solver (Mercantilism
focused on controlling gold in order for colonists to
pay for its large armies and expand its empire)
 More export – less import
 Thus, the goal of the state is wealth accumulation.
 State should use protectionists measures
 «…When we buy goods manufactured abroad, we
get the goods, and the foreigner gets the money.
When we buy goods manufactured at home, we get
both the goods and the money» Abraham Lincoln
Not so right: you cannot produce everything and one
day opportunities and resources will end
Strengths and influences
Weaknesses and debates
 Highlighted the
importance of
international trade for the
economy
 Defined the role of state
in international economic
activities. Created the
basics of trade
protectionism
 For the first time
described and explained
the trade balance
 David Hume: “money is none
of the wheels of trade: It is
the oil which renders the motion
of the wheels smoother
and easier”.
 Static view on the world trade
– only one country wins,
and the others lose
 In long run M does not work:
country sells – prices rise –
inflation
 Mercantilism theory only thinks
about producing and exporting
goods. This hardly paid
attention to the welfare of
workers which leads to the
exploitation of workers.
 Mercantilism was one-way
traffic. It focuses on export but
not import, it is not easy to be
self-sufficient. Many countries
of Europe fails to be selfsufficient which increased their
miseries.
Classic

THEORY OF COMPARATIVE ADVANTAGES: RICARDO MODEL (ONE FACTOR OF
PRODUCTION – LABOR)
Ricardo's theory says that countries should specialize
in those goods that cost the least to produce and buy
those goods that cost the most to produce, even if
this means that these goods are less costly to produce
on the home market than to buy from abroad.
Opportunity (alternative) costs – the cost of pursuing
one activity at the expense of another activity
Countries should:
• Specialize in what they are relatively good at
• Produce and export what they are relatively good at
• Buy those products and services in the production
of which other countries are relatively better
 Does not consider situations
where absolute advantages are
concentrated in one or a few
countries: can then countries
that do not have absolute
advantages participate in
international trade? Some
countries are quite equally
 The theory of absolute
advantage dictated that only
two-way trade can occur
between any two nations with
any two commodities that are to
be exchanged. Due to the
advancement of technology,
this assumption now does not
work. The theory failed to take
into account the multilateral
trade that has become very
common now.
 According to the theory, free
trade exists between the nation.
Hence not taking into
consideration the trade policies
of the nations.
 At present date, the
comparative advantage concept
is more effective than the
absolute advantage. It helps in
practical decision-making.
Good example:
 It takes into account only one
factor of production – labor
 It does not answer the question
about the nature of relative
advantage
 Government may restrict trade:
it could create complications
for the companies that were
relying on those countries for
resources.
 Transport cost may outweigh
the comparative advantage
 Increased specialization may
make scaling difficult: If your
products and services require
specialized skills, it may be
difficult to increase the
organizational size or output, as
employees with those
specialized skills can be
difficult to find.
Since labour is cheap in China, it
has the comparative advantage
with the United States of America.
Chinese workers are able to
produce simple consumer goods at
a much lower opportunity cost.
On the other hand, The United
States’ comparative advantage lies
in capital-intensive, specialized
labour and American workers are
able to produce goods or
investment opportunities at lower
opportunity costs. If China and the
United States specialize and trade
along these lines, it will be
beneficial for both of them.
 The benefit of
comparative advantage is
the ability to produce a
good or service for a lower
opportunity cost. A
comparative advantage
gives companies the
ability to sell goods and
services at prices that are
lower than their
competitors, gaining
stronger sales margins and
greater profitability.
 Lower costs aren't the only
benefit of comparative
advantage. Entering into
trade with other countries
can also create job
opportunities where they
may have been done
before.
Classic
THEORY OF ABSOLUTE ADVANTAGE
Smith pointed out that the nation should specialize in
producing commodities that are advantageous in
monetary terms.
 Overall production of
the commodities is of
lower cost due to the
cheaper alternative of
raw materials.
 Fewer materials are used
to produce the final
product. Hence it cuts
down the operating time.
 In terms of hourly
wages, cheap labor is
used to produce the final
product.
 This concept allows for
the specialization or
division of labor, which
results in the higher
productivity of goods at
a lower production cost.
 Improves the efficiency
in making the decisions,
for instance, resource
allocation by a nation for
the production of the
commodities.
Classic
Adam Smith: A government has an absolute
advantage in the production of a good when it
produces that good at the lowest cost
 Efficiency higher than in other countries - exp
 Efficiency lower than in other countries – imp
- Leontief concludes from
this result that the US
should adopt its
competitive policy to
match its economic
realities.
- Leontief considered only
capital & labour inputs, leaving
out natural resource inputs But
in reality, capital & natural
resources are used together in
the production of commodities.
- International trade leads to equalization of prices
not only for goods, but subsequently for factors of
production, equalizing incomes from the use of
homogeneous factors of production between
countries.
- Trade is not only the exchange of goods, but also
indirectly the exchange of factors of production.
- Prices of identical factors of production, such as
the wage rate or the rent of capital, will be
equalized across countries as a result of
international trade in commodities. The theorem
assumes that there are two goods and two factors of
production, for example capital and labour. Other
key assumptions of the theorem are that each
country faces the same commodity prices, because
of free trade in commodities, uses the same
technology for production, and produces both
goods. Simple summary of this theory is when the
prices of the output goods are equalized between
countries as they move to free trade, then the prices
of the factors (capital and labor) will also be
equalized between countries.
If at a constant world price in the country there is an
increase in one of the factors of production,
then it will increase the production of a good that is
more capacious relative to this factor at the
expense of other goods
- Crucially these
assumptions result in
factor prices being
equalized across countries
without the need for factor
mobility, such as
migration of labor or
capital flows.
Classic
 40-50 years of the XX century. The US economy capital abundance and labor shortage. According to
the Heckscher-Ohlin theory, the US should export
capital-intensive goods and import labor-intensive
goods. Leontief presented data that the opposite is
true.
 Possible explanation: Exports of both capitalintensive and labor-intensive goods; Imports of raw
materials, the extraction of which can be capital
intensive
Classic
 Countries with large or diverse factor endowments
are typically more wealthy and able to produce
more goods than countries with small factor
endowments
 It stated that countries would produce and export
those goods which make intensive use of factors
that are locally available in large quantities. In
contrast, import those factors that are in short
supply or locally scarce.
Classic
- Doesn’t explain why:
•Why do regions with the same
factors of production trade so
intensively among themselves?
(Such as US and EU)
• Intra-industry trade: why do
Germany and Japan trade cars
between themselves?
- The factor endowment theory,
while used to explain
overarching notions of
comparative advantage, in reality
only accounts for a small
percentage of world trade
- Branding also plays a large role
in trade
- Assumes that there is no
unemployment
- Gives more importance to
supply and less importance to the
demand of that commodity.
- Ignores price differences,
transport costs, economies of
scale, external economies, etc.
Classic
FACTOR ENDOWMENT THEORY OF HECKSCHER AND OHLIN
- Explain why: India
exports textiles and
footwear (labor-intensive
industries); Germany and
the US export vehicles
and equipment (capitalintensive); Australia and
Canada export wheat and
meat (land availability)
Implications:
- Nations gain from trade but not every
individual in each nation gains
- Factors endowment evolves over time
RYBCHINSK FACTOR PRICE EQUALIZATION THEOREM (
Y THEORY – выравнивание факторных цен)
THE
EXTENSION
OF
HECKSHEROHLIN
THEORY
LEONTIEF PARADOX
 The comparative advantage of countries arises
from the difference in endowments with factors of
production, such as land, labor and capital.
 The difference in the comparative endowment with
factors of production entails the following:
- Countries export goods that use comparatively
cheap factors of production.
- Countries import goods that use comparatively
expensive (or scarce) factors of production
a) It is given by Raymond Vernon in Mid 1960s and
the Theory consists of technology-based products.
b) A product goes through the life cycle i.e.
Introduction, Growth, Maturity, and Decline.
c) Country where the product is first launched is
Innovator and At the end of the cycle, the innovator
becomes the importer.
d) This theory says that an innovator country should
produce goods according to the product life cycle of
goods. When the demand grows, that country should
move production factories to a developing country to
meet demands at less cost.
e) Now that innovator country should export goods
from developing country and completes demand. So
this will be beneficial for both countries.
• Basically, trade in goods takes place between
countries with similar levels of GDP per
capita (according to consumer preferences)*.
• Trade between industrialized countries is
dominated by intra-industry trade, while
foreign trade between developing countries is
dominated by inter-industry trade.
*NB: we are talking about trade in manufactured
goods, not raw materials

Dynamic view on
trade and product’s
competitive advantages

The LCT theory
does a good job of
explaining what happened
to products like copiers or
other high-tech products
invented in the US in the
1960s and 70s.
In the context of modern
globalization and economic
integration, this
theory is less relevant:
• Theory is ethnocentric
• Manufacturing today is global
• Products today appear in
different markets at the same
time
1. Most appropriate for
technology-based products
2. Some products are not easily
characterized by stages so it’s
become difficult to follow this
theory.
3. Most relevant to products
produced through mass
production.
Modern
COUNTRY
THE PRODUCT LIFE CYCLE. VERNON’S THEORY
SIMILARITY THEORY.
S. LINDER
3 stages:
New: product is
being
developing
Mature: is mature
and is being bought
Standardized:
massed production
Vernon’s Product
life cycle theory
3: it is becoming more expensive to export, so
we move to exporting to developing countries
4: inconvenient to produce at home
This theory tells about
some of the necessary
factors. A country having
one of these factors can
become an exporter.
1. Only applicable when there
are many firms with different
production processes so it can
change products easily.
2. Assumes that all firms are
well-formed, which may not be
true in every case.
3. Exclude trade of intermediates
products by assumption and
cannot explain fragmentation of
production across countries
What does it mean for countries?
 There is a first mover advantage
 Countries can benefit from international trade even
if they do not differ greatly in resource or
technology endowment
 Governments should implement strategic trade
policies that protect and assist industries where it is
important to have a first-mover advantage or
economies of scale
Explains factors that are
available to a nation. These
factors can give a
competitive advantage to
the economy of a country.
NATIONAL COMPETITIVE ADVANTAGE OF INDUSTRIES (PORTER,
1990)
NEW TRADE THEORY. P. KRUGMAN
Modern trade is based on:
 Specialization (differentiation)
 Economy of scale
 Intellectual property rights protection
 First mover advantages
• Differentiation of goods– endowing a product with
specific characteristics that distinguish it from a
number of absolutely similar products
• Economy of scale- the increase in production
outweighs the increase in the cost of its
implementation
• First mover advantage – company that gets to the
market first get more (Colgate, xerox, google)
1)Japan and electronics. Companies compete with
each other within country and it helped to become
globally competitive
2)You cannot be successful if you do not have
resources
1. Factor Condition – Factors available like labour,
capital, land, etc
2. Related & Supported Industries – Supporting
companies to get raw material, transportation, etc
3. Strategy, Structure, Rivalry- How many
Competitors and what structure they are using in the
sale, marketing, etc
4. Demand Condition- How much demand for goods
are there, what are the needs of people, country, etc
Export goods from that industry where the diamonds
are favourable.
CRITICISM OF PORTER
THEORY
Governments can:
 Influence demand through
product standards
 Influence competition through
antitrust regulation
 Influence the availability and
accessibility of highly qualified
personnel and developed
infrastructure
Random events are not taken
into account
In his book, Porter was
optimistic about the future of
Korea & less optimistic about
the future of others.
FACTORS OF PRODUCTION
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Main (natural or geographical)
Common (usable in different industries; universal)
Developed (acquired as a result of development and capital investments) – MORE MOBILE
Special (applied to one or a narrow group of industries)
Capital – half-mobile factor
DUTCH DISEASE
Theory explains consequences for the
national economy associated with the
development and export of significant
amounts of a natural resource
 The development of a large natural
gas field in Holland
TRADE IN BALANCE
Trade is beneficial in all sorts of ways. It provides consumers with goods they could nototherwise enjoy. It
boosts variety. Yet its biggest boon, economists since Adam Smith have argued, is that it makes countries
richer. Trade creates larger markets, which allows for greater specialisation, lower costs and higher
incomes. Economists have long accepted that this overall boost to prosperity might not be evenly spread.
Trade generates enormous global gains in welfare. Generous trade­adjustment assistance, job retraining
and other public spending that helps to build political support for trade are therefore sound investments. To
make any of these policies work, however, economists and politicians must stop thinking of them as
political goodies designed to buy off interest groups opposed to trade. They are essential to fulfilling trade’s
promise to make everyone better off.
WHY OPEN MARKETS MATTER
 Relatively open economies grow faster than relatively closed ones, and salaries and working
conditions are generally better in companies that trade than in those that do not. More prosperity
and opportunity around the world also helps promote greater stability and security for everyone.
 Trade has delivered unprecedented access to goods and services, with a revolution in the
availability of goods for low income households.
 Not only does trade lower prices, it also provides jobs for millions of people around the world.
 Trade also plays a role in raising incomes and improving overall working conditions. And whether
the measure is injuries on the job, child labour, informality, or effects on female labour, open
economies significantly out-perform closed ones, and labour rights are generally better respected.
 Trade openness also benefits firms, by giving producers access to bigger markets, allowing them to
increase the scale of their production, and encouraging market competition and innovation. Firms
that export tend to be more productive than those that do not.
 Trade also allows new technologies to move more freely around the world, benefitting more
companies and more people
 A powerful driver of structural change, trade helps to reallocate resources to the sectors and areas
where they can be most efficient.
Topic 3. Formulation of national trade policy
IS FREE TRADE REAL?
Free trade occurs when the state does not restrict its citizens in what they can buy and sell in other
countries
THE GLOBAL TRADE AFTER WORLD WAR II




The modern system of international trade developed after the Second World War
Global integration: GATT – WTO (1995)
Regional economic integration
Growth of protectionism since 2008 (Slowbalization)
INSTITUTIONS REGULATING INTERNATIONAL TRADE
Objectives of WTO:
1. Resolve trade disputes between countries
2. Eliminate discrimination between trading partners
3. Stimulate economic growth
What WTO does?
Main principles of WTO
1. International Commercial Arbitration
2. Most favored nation (MFN) principle
• Preferential treatment (generalized system of preferences)
3. By increasing competition, lowering prices and increasing jobs
REGIONAL ECONOMIC INTEGRATION





Free trade zones: Mexico – USA – Canada;
Africa;
Custom union: Russia, Kazakhstan, Belarus,
Armenia
Common market: different continents: some
african, Asian countries
Economic union: EU
Political union: USSR
GROWTH OF PROTECTIONISM
WHY PROTECTIONISM IS ON THE RISE DESPITE THE NEGATIVE EFFECTS OF PROTECTIONIST
MEASURES ON PUBLIC WELFARE?
THE THEORY OF COMPARATIVE FACTORS ENDOWMENT (HECKSCHER-OHLIN)
This means that unskilled workers are disadvantaged in developed countries, while skilled workers are
disadvantaged in developed countries.
What can countries do to compensate for the losses of certain groups?
CONSEQUENCES OF RESTRICTING FREE TRADE
• Economic slowdown and job cuts
• Export industries have a smaller market, which
means less demand and fewer jobs
• Less efficiency, less consumer benefit (higher
prices for imported goods)
• Many developing countries went out poverty by
specializing in manufacturing with unskilled labor,
which has enabled them to increase their levels of
prosperity. With no trade, these doors will close
+
• More equality in developed countries, but less in
developing countries
• Some jobs will return to importing sectors of the
economy
• However, companies will seek to reduce costs
and automate processes.
If a country stops international trade, then the highincome population will lose 28% of their purchasing
power, while the poor will lose up to 63% of their
purchasing power
MIGRATION
DOES MIGRATION AFFECT THE INTERNATIONAL ECONOMY, BUSINESS, TRADE? HOW?
GDP = C+I+G+Xn
Home: people leave the country  suply decreases  demand decreases (less people – less consumption). Country
will get some money from host (if money will come)
Host: supply,demand increaseesboost of economy. Immigrants steal some jobs  GDP, unemployment increases.
Some money will go back to home country
WHY IS THERE OPPOSITION TO MIGRATION?
Arguments “against”
 Decrease in the level of wages
 Reducing the number of jobs
 Spending taxpayer money
 Psychological (it's easier to put the blame on a
foreigner)
 Loss of national and cultural identity
”IMPOSSIBLE TRINITY”*
Arguments “for”
• Material: Economic
• Intangible: Increasing creativity and innovation
RATIONALE FOR TRADE INTERVENTION
ОБОСНОВАНИЕ ТОРГОВОГО
ВМЕШАТЕЛЬСТВА
INDUSTRY LEVEL ARGUMENTS





Domestic industries protection
Infant industry
Maintenance of existing jobs
National security
Strategic trade
NATIONAL DEFENSE ARGUMENT
 Raw Materials
 Machinery
 Technology
Examples: Japan: investing in shipbuilding after
World War II;
The USA: IT protection because of cyber attacks.
MAINTENANCE OF EXISTING JOBS
Government’s arguments
om Competition
INFANT INDUSTRIES
 Government Protection
 Comparative Advantage
Drawbacks: the choice of industry is political, rather
then economical.
Many industries continue to benefit from
protectionism policy till their “old ages”.
STRATEGIC TRADE THEORY
ECONOMIC DEVELOPMENT PROGRAMS


Export Promotion Strategy - Encouraging firms to compete in foreign markets (Singapore, South Korea,
Taiwan)
Import Substitutio n Strategy - Imposing high barriers to imported goods (Australia, Argentina, India, Brazil)
INDUSTRIAL POLICY



Identifying key domestic industries critical to the country’s future economic growth
Formulating programs that promote their competitiveness
Adopting industrial policy
Bad examples: France supported automobiles, computers, commercial aircraft and communication. Huge
government spending for almost nothing. Argentina created a vibrant electronic goods manufacturing center.
Argentinian consumers paid two times more for these goods than their counterparts in Chile
PUBLIC CHOICE ANALYSIS


Interest Groups
Elected Officials
The USA: tariffs on imported steel. Beneficiaries: steel producers. Losers: steel using domestic firms, consumers of
automobiles, refrigerators etc; dockworkers in Baltimor
BARRIERS TO INTERNATIONAL TRADE

Tariffs
 Export Tariffs
 Transit Tariffs
 Import Tariffs

Nontariff Barriers
 Quotas
Quota: a numerical limit on the quantity of a good that may be imported into a country during some
time period

Tariff Rate Quotas (TRQ):
o Low tariff rate under quota’s threshold
o Prohibitive tariff rate above the threshold
 Numerical Export Controls
 Other NTBs
 Product and Testing Standards
 Regulatory Controls
 Restricted Access to Distribution Network
 Public-Sector Procurement Policies
 Local-Purchase Requirements
 Currency Controls
 Investment Controls
Paul Krugman: strategic trade policies aimed at establishing domestic firms in a dominant position in a global
industry are beggar-thy-neighbor policies that boost national income at the expense of other countries. Countries
that attempt to use such policies will probably provoke retaliation ответный удар
INSTRUMENTS OF EXPORT REGULATIONS
Export restrictions


Export Tariffs
Export quotes
Export promotion



Export finance programs: Export subsidy, Export credit
Free economic zones: Maquiladora system
State agencies
SPECIFICITY OF EMERGING MARKETS





Instability of export earnings
Raw material nature of exports
Politics rules the economics
Industrialization
Dualism of the economy - одновременное существование различных способов производства,
потребления, рынков труда, мешающих друг другу в рамках одной экономической системы. Э.д.
характерен для переходных периодов развития экономики.
SUM UP



The trade policy of any country is a set of principles and arguments for free trade and arguments for
protectionism in the interests of certain stakeholders, often presumed as national interests.
The trade policy of any country includes various instruments of foreign trade regulation
The instruments of foreign trade regulation are divided into two types: tariff and non-tariff (administrative).
Used for both import and export
WHY THE U.S. NEEDS THE WORLD TRADE ORGANIZATION
 Its job is to monitor international trade rules, reduce trade barriers, and settle disputes. WTO members must
give each other “most-favored-nation” (MFN) status, which means a nondiscriminatory low tariff rate.

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
WTO provides an especially strong boost for trade flows between countries that are not allied geopolitically,
and between nations that are different from each other in terms of geopolitical power or regime type. WTO
have helped reduce agricultural tariffs, which are notoriously economically inefficient and politically difficult
to eliminate.
U.S. exporters sell more of their goods overseas because WTO rules require nations to keep trade barriers
low for other member states. For example, the original WTO agreement provided U.S. exporters greater
access to European and Japanese agricultural markets. And one study finds that the U.S. government gets
better results by using the WTO’s trade dispute settlement system instead of negotiating with other
countries directly.
A number of studies show that most U.S. job losses actually resulted from changes in technology or
efficiency. And China’s entry into the WTO benefited American consumers by decreasing the prices of
manufactured goods. Ultimately, the U.S. may face a trade-off between protecting U.S. manufacturing jobs
and enabling consumers to save money by purchasing cheap imports from trading partners like China.
WTO members agree to settle their trade disagreements within the organization’s trade dispute settlement
system, which is designed to be unbiased. But evidence suggests that the WTO system may favor U.S. and
European Union exporters.
Maintaining an “open” global trading system hasn’t been easy. Countries around the world imposed more
than 2,500 trade restrictions after the onset of the global financial crisis in October 2008 — and threequarters of these restrictions remained in place at the end of 2015.
U.S. exporters would lose preferential access to many global markets if the U.S. pulled its WTO membership
IS MIGRATION GOOD FOR THE ECONOMY?
Labour markets
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


Migrants accounted for 47% of the increase in the workforce in the United States and 70% in Europe over
the past ten years.
Migrants fill important niches both in fast-growing and declining sectors of the economy.
Like the native-born, young migrants are better educated than those nearing retirement.
Migrants contribute significantly to labour-market flexibility, notably in Europe.
The public purse



Migrants contribute more in taxes and social contributions than they receive in benefits.
Labour migrants have the most positive impact on the public purse.
Employment is the single biggest determinant of migrants’ net fiscal contribution.
Economic growth



Migration boosts the working-age population.
Migrants arrive with skills and contribute to human capital development of receiving countries.
Migrants also contribute to technological progress.
TRADE WARS AND THEIR IMPACT ON THE ECONOMY AND YOU
A trade war occurs when a nation imposes tariffs or quotas on imports, and foreign countries retaliate with similar
forms of trade protectionism. As it escalates, a trade war reduces international trade.

But in the long run, a trade war costs jobs. It depresses economic growth for all countries involved. It also
triggers inflation when tariffs increase the prices of imports.
China is the world's top exporter. Its comparative advantage is that it can produce consumer goods for lower
costs than other countries can. China has a lower standard of living, which allows its companies to pay lower
wages. American companies can't compete with China's low costs, so the U.S. loses manufacturing jobs.
Americans, of course, want these goods for the lowest prices. Most are not willing to pay more for "Made in
America." The Trump Administration used several tariff measures to start the trade war with China, and it hoped
that tariffs would reduce the U.S. trade deficit.



The trade war has raised the prices of consumer goods that use steel and aluminum. Costs have increased on
imported clothes hangers, heavy-equipment materials, and computer chip and tool makers.
In the long term, trade wars slow economic growth. They create more layoffs, not fewer, as foreign
countries retaliate.
Over time, trade wars weaken the protected domestic industry. Without foreign competition, companies
within the industry don't need to innovate. Eventually, the local product would decline in quality, compared
to foreign-made goods.
THE REAL REASON MANUFACTURING JOBS ARE DISAPPEARING
We've heard a lot of rhetoric lately suggesting that countries like the US are losing valuable
manufacturing jobs to lower-cost markets like China, Mexico and Vietnam -- and that
protectionism is the best way forward. But those jobs haven't disappeared for the reasons you
may think, says border and logistics specialist Augie Picado. He gives us a reality check about what
global trade really looks like and how shared production and open borders help us make higher
quality products at lower costs.
TRADE WAR LEAVES BOTH US AND CHINA WORSE OFF
 Сonsumers in the US are bearing the heaviest brunt of the US tariffs on China, as their associated costs have
largely been passed down to them and importing firms in the form of higher prices.
 However, the study also finds that Chinese firms have recently started absorbing part of the costs of the
tariffs by reducing the prices of their exports.
 A lose-lose trade war is not only harming the main contenders, it also compromises the stability of the global
economy and future growth
 Higher prices for Chinese consumers, losses for US exporters and trade gains for other countries.
CLOSING CASE (Hill, International Business) Why Did Global Food Prices Rise?
 The increased demand has been driven by greater food consumption in rapidly developing nations, most
notably China and India.
 Not surprisingly, the subsidies have created an incentive for farmers to plant more crops that can be turned
into bio-fuels (primarily corn and soy beans). This has diverted land away from production of corn and soy
for food, and reduced the supply of land devoted to growing cropsthat don’t receive bio-fuel subsidies, such
as wheat. This highly subsidized source of demand seems to be having a dramatic effect on demand for corn
and soy beans.
 Plans in both the United States and the European Union call for an increase in the production of bio-fuels,
but neither political entity has agreed to reduce tariff barriers on sugar cane or to remove the tradedistorting subsidies given to those who produce corn and soy for bio-fuels.
Topic 4. The International Monetary System & Balance of Payments
BALANCE OF PAYMENT
The balance of payments is a record of economic transactions between residents of one country and the rest of the
world.
Characteristics
Double-entry Bookkeeping System
Credit - growth (receipt) of payments in favor of residents of the country
Debit - the outflow of funds from the residents of the country in favor of the rest of the world
Double entry system
• We record every operation twice
• In the balance of payments, the debit must equal the credit.
International transactions are calculated for a certain period of time (usually a year)
Only transactions in currency (money) are considered
Transactions between residents are considered: (people, businesses, government organizations, NPOs)
MAIN COMPONENTS OF BOP
Current account
1. Trade (export / import)
• Merchandise trade
• Services trade
2. Investment income (income from investments
abroad, compensation, etc.)
3. Secondary income (one-way transfers, gifts,
money transfers)
• Money transfer from migrants (remittances)
Capital account
1. Foreign direct investments (long-term)
2. Foreign portfolio investments (short-term)
3. Bank claims and liabilities
4. Official government reserves
Capital inflows are credits in the BOP accounting
system:
 Foreign ownership of assets in a country
increases.
 Ownership of foreign assets by a country’s
residents declines.
Capital outflows are debits in the BOP accounting
system:
 Ownership of foreign assets by a country’s
residents increases.
 Foreign ownership of assets in a country
declines.
OFFICIAL RESERVES ACCOUNT СЧЕТ ОФИЦИАЛЬНЫХ РЕЗЕРВОВ
Records the level of official reserves held by a national government
Official reserves comprise 4 types of assets:




Gold
Convertible currencies (Convertible currencies - A convertible currency is any nation's legal tender that can
be easily bought or sold on the foreign exchange market with little to no restrictions. A convertible currency
is a highly liquid instrument as compared with currencies that are tightly controlled by a government's
central bank or other regulating authority.)
Special Drawing Rights (SDRs) - искусственно созданное средство платежных расчетов МВФ, не
имеющее физической формы. Валютный курс SDR ежедневно определяется на основе обменных
курсов корзины валют — доллара, евро, иены, британского фунта и юаня.
Reserve positions at the IMF
BOP accounting system must balance
Current Account + Capital Account + Official Reserves Account + Errors and Omissions = 0
Why errors and omissions occur?



Underreporting of capital account transactions
Deliberate actions by individuals
Errors in the current account
BOP ACCOUNTING SYSTEM: DEFINING CURRENT ACCOUNT SURPLUSES AND DEFICITS


Positive trade balance - surplus
Negative trade balance - deficit
Current account surplus
A current account surplus occurs when a country
consumes less than it produces (high savings)
Current account deficit
A current account deficit occurs when a country
consumes more than it produces (saving is low,
borrowing is high)
GDP= C + I + G + (E-I)
GDP = A + B
B = GDP – А

If GDP > A, the country produces more than it consumes, then it has a surplus.

If GDP < A, the country consumes more than it produces, then it has a deficit
Deficit countries borrows money from saving countries
Surplus and deficit countries need each other. Need to sell – need to borrow
What can cause low consumption?
1) Migration -> demand is decreasing
2) Cultural: in Japan people love save money, they do not save a lot
3) China: they want to grow faster with a help of export
During the crisis deficit countries suffer more
CURRENT ACCOUNT AND NATIONAL GROWTH MODEL
Countries with current account deficit
 Consume more than produce
 Economic growth is driven by domestic demand
 They need borrowing from abroad to meet high
domestic demand
Countries with current account surplus
 Consume less than they produce
 Economic growth is driven by external demand
 They need global demand to keep their GDP
growing


If there is no rest of the world, their GDP will be
growing
If there is no rest of the world, their GDP will be
lower
HOW TO CHANGE THE STATE OF THE CURRENT ACCOUNT?
•
Deficient countries can only adjust their current account by changing their habits: (consuming less, saving
more).
•
Surplus countries can spend/consume more, save less through taxes, among other things.
HOW CAN KNOWLEDGE OF THE BALANCE OF PAYMENTS HELP US?
•
•
•
•
Helps to identify growing markets for goods and services
Can warn against possible political decisions that change the business climate
May indicate a decrease in government foreign exchange reserves
Signals an increasing risk of lending to certain countries
WHY INTERNATIONAL MONETARY SYSTEM EXIST?
Most of the countries have their own currency
INTERNATIONAL MONETARY AND FINANCIAL SYSTEM


International monetary system: the institutional framework, rules, and procedures by which national
currencies are exchanged for one another
Global financial system: the collection of financial institutions that facilitate and regulate the flows of
investment and capital funds worldwide.
HISTORY OF THE INTERNATIONAL MONETARY SYSTEM: THE GOLD STANDARD




Under the gold standard, countries agree to buy or sell their paper currencies in exchange for gold
In 1821 the United Kingdom became the first country to adopt the gold standard
The gold standard effectively created a fixed exchange rate system
Sterling-based Gold Standard: Most firms accepted either gold or British pounds in settlement of
transactions
PRINCIPLES OF GOLD STANDARD
1 ounce gold = £4.247
1 ounce gold = $20.67
£1 =$ 4,866964916411585
COLLAPSE OF THE GOLD STANDARD


World War I: Commercial transactions between the Entente countries and the Central Powers have
practically ceased; Countries stopped selling or buying gold at the value of their currencies. Коммерческие
операции между странами Антанты и Центральными державами практически прекратились; страны
перестали продавать или покупать золото по стоимости своих валют
Great depression
BETWEEN WORLD WAR I AND WORLD WAR II


Countries experimented with floating exchange rates in the 1930s. Страны экспериментировали с
плавающими обменными курсами в 1930-х годах
National currencies devalued. Девальвация национальных валют
Девальва́ция — снижения курса национальной валюты по отношению к твёрдым валютам в системах с
фиксированным курсом валюты, устанавливаемым денежными властями. Ранее термин использовался в
контексте уменьшения золотого содержания денежной единицы в условиях золотого стандарта. Девальвация
— продиктованное экономической политикой снижение реального валютного курса.
BRETTON WOODS ERA
Bretton Woods Conference 1944
44 countries agreed:

Resume the gold standard system in a modified form

Create two international organizations that will contribute to the restoration of the international economy
and the world monetary system
DOLLAR-BASED GOLD STANDARD
•
•
•
U.S. Dollar–Based Gold Standard (1 oz gold = $ 1
Fixed exchange rate
Adjustable peg system: however, the exchange rate could fluctuate slightly (1% above or below the
established rate). Example: £1=$2.772 - $2.828
INTERNATIONAL ORGANIZATIONS
Achievements
Functions
International Bank for Reconstruction and
Development-World Bank - Международный банк
реконструкции и развития - Всемирный банк
The World Bank Group is one of the world’s largest
sources of funding and knowledge for developing
countries.
Together, IBRD and IDA form the World Bank, which
provides financing, policy advice, and technical
assistance to governments of developing countries.
IDA focuses on the world’s poorest countries, while
IBRD assists middle-income and creditworthy poorer
countries.
Its five institutions share a commitment to reducing
poverty, increasing shared prosperity, and promoting
sustainable development
IFC, MIGA, and ICSID focus on strengthening the
private sector in developing countries. Through these
institutions, the World Bank Group provides financing,
technical assistance, political risk insurance, and
settlement of disputes (урегулирование споров) to
private enterprises, including financial institutions.
The trust funds listed below are organized around the
first three Forward Look pillars—Serving All Clients,
Supporting Resource Mobilization, and Leading on
Global Issues—and highlight the various value
propositions of WBG trust funds.
The 38 trust fund stories featured in this section follow
a standardized format and include trust fund donors,
trust fund managing unit, and the Forward Look pillars
and associated value propositions.
The World Bank promotes long-term economic
development and poverty reduction by providing
technical and financial support to help countries
implement reforms or projects, such as building
schools, providing water and electricity, fighting
disease, and protecting the environment.
International Monetary Fund - Международный
валютный фонд
1. The International Monetary Fund aims to
reducing global poverty, encouraging
international trade, and promoting financial
stability and economic growth.
2. The IMF has three main functions: overseeing
economic development, lending, and capacity
development. надзор за экономическим
развитием, кредитованием и наращиванием
потенциала
3. Through economic surveillance, the IMF
monitors developments that affect member
economies as well as the global economy as a
whole.
4. The IMF lends to its member nations with
balance of payment problems so they can
strengthen their economies.
5. The group also provides assistance, policy
advice, and training through its various technical
assistance programs.
1. Stability in Exchange Rates
2. Promotion of International Trade
3. Check on Multiple Exchange Rates
4. Broadening of the Credit Structure
5. Compromise between Gold Standard and
Managed Paper Standard
6. Institution for Consultation and Guidance
Criticism
It has been accused of being a US or Western tool for
imposing economic policies that support Western
interests.
Critics argue that the free market reform policies,
which the Bank advocates in many cases in practice are
often harmful to economic development if
implemented badly, too quickly (shock therapy), in
wrong sequence, or in very weak, uncompetitive
economies.
The World Bank has been criticized because of a
perceived conflict between their stated goals and their
actual goals.
The issue of political power imbalances is exacerbated
by another long-standing critique of the Bank and
Fund: that the economic policy conditions they
promote – often attached or ‘recommended’ as part of
loans, projects, technical assistance, or financial
surveillance – undermine the sovereignty of borrower
nations, limiting their ability to make policy decisions
and eroding their ownership of national development
strategies.
1. Conditions of loans
On giving loans to countries, the IMF make the
loan conditional on the implementation of certain
economic policies. These policies tend to involve:
Reducing government borrowing – Higher taxes
and lower spending
Higher interest rates to stabilise the currency.
Allow failing firms to go bankrupt.
2. Exchange rate reforms.
When the IMF intervened in Kenya in the 1990s,
they made the Central bank remove controls
overflows of capital. The consensus was that this
decision made it easier for corrupt politicians to
transfer money out of the economy (known as the
Goldenberg scandal
3. Devaluations
In earlier days, the IMF have been criticised for
allowing inflationary devaluations.
4. Neo-Liberal Criticisms
There is also criticism of neo-liberal policies such
as privatisation. Arguably these free-market
policies were not always suitable for the situation
of the country
5. Supporting military dictatorships
The IMF has been criticised for supporting military
dictatorships in Brazil and Argentina, such as
Castello Branco in 1960s received IMF funds
denied to other countries.
COLLAPSE OF BRETTON WOODS SYSTEM 12 ILLUSTRATION OF SITUATION IN ENGLAND “RUNS ON THE BANK
THE END OF BRETTON WOOD SYSTEM
•
•
•
Triffin Paradox: Foreigners need to increase their dollar savings to finance international trade. At the same
time, the more dollars they have, the less they believe that the US will be able to redeem (выкупать) these
dollars for gold. The less trust, the greater the desire to get rid of dollars and get gold in return.
Unwise monetary policy during the Vietnam War
Nixon's 1971 speech (announcing that the US would no longer be able to exchange dollars for gold at the
rate of $35 an ounce)
HISTORY OF THE INTERNATIONAL MONETARY SYSTEM: PERFORMANCE OF THE IMF SINCE 1971
•
•
•
•
•
•
•
Flexible (or Floating) Exchange Rate System (type of exchange rate regime in which a currency's value is
allowed to fluctuate in response to foreign exchange market events. A currency that uses a floating
exchange rate is known as a floating currency, in contrast to a fixed currency, the value of which is instead
specified in terms of material goods, another currency, or a set of currencies (the idea of the last being to
reduce currency fluctuations). In the modern world, most of the world's currencies are floating, and include
the most widely traded currencies: the United States dollar, the euro, the Swiss franc, the Indian rupee, the
pound sterling, the Japanese yen, and the Australian dollar.)
Managed Float (or, a Dirty Float)
Jamaica Agreement
Flexible exchange rate system legitimized
Pegged exchange rate
Crawling pegs
European Monetary System (EMS)
o 1979
o Unified currency exchange mechanism: Fixed exchange rate between European currencies (within
±2.25%)
o Floating rate against USD and other currencies
MODERN FINANCIAL SYSTEM: IS EVERYTHING WORKING WELL?
•
•
•
•
International debt crisis: 1973 Arab-Israeli war. The rise in oil prices. High inflation in importing countries.
1978-1979 - oil shock.
In 1982, Mexico was unable to service its external debt. The crisis has spread to Latin America, Africa and
Asia.
Asian crisis, 1997. Too greater dependence on foreign short erm debt. Consequences of shock spread to
Latin America and Russia
World financial crisis 2008-2009
CURRENT ACCOUNT DEFICITS: IS THERE A PROBLEM?
• The current account can also be expressed as the difference between national (both public and private)
savings and investment. For capital-poor developing countries, which have more investment opportunities
than they can afford to undertake because of low levels of domestic savings, a current account deficit may
be natural.
• Moreover, in practice, private capital often flows from developing to advanced economies. The advanced
economies, such as the United States (see chart), run current account deficits, whereas developing countries
and emerging market economies often run surpluses or near surpluses.
• The country should run a current account deficit (borrow more) depends on the extent of its foreign
liabilities (its external debt) and on whether the borrowing will finance investment with a higher marginal
product than the interest rate (or rate of return) the country has to pay on its foreign liabilities.
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When foreign financing is no longer available and, indeed, a country is forced to run large surpluses to repay
in short order what it borrowed in the past.
Because the current account deficit also implies an excess of investment over savings, it could equally be
pointing to a highly productive, growing economy
GLOBAL CLASSROOM
Blockchain
First appeared in 1991
 A group of notaries theorising the idea
 Attempt to make digital timestamps – impossible to forge
• Became practical in 2009
 Creation of Bitcoin by Satoshi Nakamoto
Distributed ledger
Data
• From: me
• To: you
• Amount: 1₿
• Hash has a symbol: #
• Unique identifier
• Looks like this: 360247b25278c5f3ead3
4cfc6ae607adc111196
• Changes every time the block is modified
• Excellent way to keep track of any change
• Hash + hash from the previous block
• Allows you to check whole chain from end
to start
Proof-of-work
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Computers go fast now
Hash is just a not so long line of characters
You could change many blocks (or all) in no time
Proof-of-work is a process that slow down changing or creating blocks
10 minutes per block for bitcoin
About 3070803 bitcoin blocks in circulation
... good luck to hack that
P2P network
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Peer-to-peer
Simply means from one person to another person
Is a network that anyone can join
All members get a full copy of the block chain (with data and hashes)
Each user can independently check the coherence of the whole chain
The result from all separate users is centralised
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If there is a problem, most users will return an error and fraudulent transactions can be stopped by the node
To accept changes, there need to be consensus
Blockchain security
• Traceability throughout the chain
• Proof-of-work
• P2P
• To hack a system as such you need to:
 Change all hashes from the block you want to modify to the last
 Compute proof of work for every block (+ new blocks are created non stop)
 And own or corrupt 51% of the P2P network or more
 We talk about millions of blocks
Bitcoin
• First crypto
• Made by Satoshi Nakamoto
• In 2009
• Became a legal tender in El
Salvador
• Often accused of eating too many
resources and being an economic
bubble
• Based on blockchain just as we
saw before
Ethereum
• Russian product, made by
Vitalik Buterin in 2011
• 2nd largest in market
capitalisation
• Based on blockchain too –
but uses smart contracts
• This is more advanced,
please see additional
resources
• Supports NFT trade
Stable coins
• Fixed on the value of a real life asset,
or a centralised currency
• Gold, the dollar, the euro, ...
• Some are issued by central banks •
Some other are audited by central
banks
• Most remain decentralised
• Euro tether
• Paxos Standard
• E-gold (technically launched in 1996 –
but remained largely unknown)
Non-fungible tokens
(взаимозаменяемые)
• 2 bitcoins can not be
differentiated from each other
(=fungible)
• NFTs are unique
• Usually they are linked to
numerical art (or so called art)
object
• They can be sold or swapped
• NFTs became an impressive
speculative investment in the past
year
Memes and crypto – Dogecoin
• Released in 2013 as a joke
• Based on the shiba inu
meme
• Perhaps some of the most
lucrative jokes – hit market
capitalisation of 85 billion $ in
2021
Cryptos as an investment
• They are often seen as a highly speculative investment
• Risky but often very lucrative
• Highly cycle based – there are weeks where you loose cash on them
• Diversification is key
• Be aware! Many cryptos are correlated to each other
• A lot of them fall and raise with bitcoin – like Ether
• So called Shitcoins can be very lucrative but they often fall sharply after reaching incredible heights
• Dogecoin is a counterexample of this
INTERNATIONAL FINANCIAL MARKETS AND EXCHANGE RATES
THE ECONOMICS OF FOREIGN EXCHANGE
Exchange rate - the price of one currency in another currency
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From currency perspective – it is better to import (as rubble became higher). But our impot companies (oil)
suffers
Emerging markets are interested in not high currency (high currency leads to fall in export)
The exchange rate is set by supply and demand in the market (given a flexible exchange rate system)
Currency supply:
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Import
FDI (outflows)
Outflow tourism
Speculations and interventions
How to decrease supply: we sell foreign currency, prices go
up
Currency demand:
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Export
Inward FDI
Incoming tourism
Speculations and interventions
HOW EXCHANGE RATE INFLUENCES THE ECONOMY
HOW THE STATE REGULATES THE CURRENCY EXCHANGE MARKET?
Government’s tools
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Interest rate
Currency reserves
IMPOSSIBLE TRINITY
EXCHANGE RATE
Managed exchange rate
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Currency board: Hong Kong, Bulgaria
Pegs: Denmark
crawling pegs: Honduras, Botswana
Targeted exchange rate: ЕU
Free exchange rate
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Managed floating exchange rate: Kenya, India
Free floating exchange rate: USA, UK, Canada, Australia
Use of foreign currency
 Dollarization: Ecuador, Panama, Zimbabwe
 Euro – Montenegro
Advantages of a Strong Dollar
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Traveling Abroad Is Cheaper
Imports Are Cheaper
Multinationals That Do Business in the U.S. Benefit
Status as World Reserve Currency Is Bolstered
Disadvantages of a Strong Dollar
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Tourism to the U.S. Is More Expensive
Exporters Suffer
US Companies Conducting Business Abroad Are Hurt
Emerging Market Economies Are Negatively Impacted: Foreign governments that require US dollar reserves
will end up paying relatively more to obtain those dollars.
CURRENCY EXCHANGE MARKET
THE STRUCTURE OF THE CURRENCY EXCHANGE MARKET
 The volume of the currency exchange market is constantly growing (6.6 trillion in 2019, about 10 trillion in
2020)
 The largest currency exchange platforms: London, New York, Singapore and Tokyo exchanges
 The US dollar is involved in approximately 85% of all transactions
MAIN FUNCTIONS OF THE FOREIGN EXCHANGE MARKET
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Maintenance of international flows of goods, services, capital
Set up of exchange rate
Providing market participants with tools for obtaining speculative income
Providing the central bank with the ability to regulate money circulation in the country
Ensuring the protection of market participants from currency risks
MAIN PARTICIPANTS OF CURRENCY EXCHANGE MARKET
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Banks
MNEs
Hedge funds Central banks
Insurance companies
Pension funds
Sovereign welfare funds
Treasury
Departments
Individuals