UConn Econ 3422 Fall 2025
Lecture 1: Global Economy (Ch.1)
Instructor: Kanda Naknoi
August 26, 2025
International finance studies financial consequences of international trade of goods and
services. To analyze their consequences, we have to keep track of international transactions.
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The Balance of Payments
The balance of payments are accounts that record international transactions. There are
many accounts for various types of transactions. Two most important account is the
current account.
ˆ Current account = Trade balance + net factor income transfer + net unilateral
transfer
– Trade balance = Exports - Imports
– Net factor income transfer = net transfer of labor income and capital income
– Net unilateral transfer = net non-market transfer, such as donations
ˆ Empirically, current account statistics are mostly driven by trade balance.
ˆ When they take positive values, we refer to them as current account surpluses.
ˆ When they takes negative values, we refer to them as current account deficits.
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Figure 1: Global Imbalances
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Global Imbalances
2.1
what are global imbalances?
ˆ Global imbalances are large and persistent US current account deficits.
ˆ For about two decades, the US current account deficit has accounted for about half
of all deficits globally.
ˆ The US is a net recipient of capital inflows.
ˆ Major offsetting current surpluses have been seen in Germany, China, Japan, some
smaller Asian economies, and oil-exporting countries.
ˆ These current surplus economies are lenders for the US.
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2.2
What caused global imbalances?
ˆ Demand and supply of products and services being exported and imported
→ prices of products and services
ˆ Prices are affected by international trade costs.
These costs are tariffs, non-tariff barriers, other taxes, costs of international shipping
and insurance, etc.
ˆ Prices are also affected by exchange rates.
ˆ Financial developments and capital markets influence flows of funds and financing
costs.
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External Wealth
ˆ External wealth = A country’s net credit position with the rest of the world
ˆ Figure 2 shows levels of external wealth from 1980 to 2012 for the US in panel (a)
and Argentina in panel (b).
ˆ All else equal, deficits cause external wealth to fall, and surpluses (and defaults)
cause it to rise.
Figure 2: Debtors and Creditors: External Wealth
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