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INTERNATIONAL ECONOMICS (6.2 GAINS FROM CONSUMPTION SMOOTHING (THE BASIC…
INTERNATIONAL ECONOMICS
6.1 LIMITS ON HOW MUCH A COUNTRY CAN BORROW: THE LONG RUN BUDGET CONSTRAINT
LONG RUN BUDGET CONSTRAINT: THE LIMIT TO HOW MUCH A NATION CAN BORROW IN THE LONG RUN- HOW AND WHY I COUNTRY MUST LIVE WITHIN ITS MEANS
HOW IT IS DETERMINED: PRICES ARE PERFECTLY FLEXIBLE, COUNTRY IS A SMALL OPEN ECONOMY, ALL DEBT CARRIES A REAL INTEREST RATE, THE COUNTRY PAYS A REAL INTEREST RATE
CALCULATING FUTURE WEALTH LEVELS
PRESENT VALUE FORM
CALCULATING THE CHANGE IN WEALTH EACH PERIOD
6.2 GAINS FROM CONSUMPTION SMOOTHING
THE BASIC MODEL
HOUSEHOLDS WHICH CONSUME ARE IDENTICAL
ASSUMED THAT CONSUMPTION IS THE ONLY SOURCE OF DEMAND AND BOTH INVESTNT AND GOV SPENING ARE ZERO
THE ECONOMY'S GDP OR OUTPUT IS Q. IT IS PRODUCED EACH PERIOD USING LABOR AS THE ONLY INPUT
CLOSED VERSUS OPEN ECONOMY: SHOCKS
FOREIGN RESERVES: SAFE ASSETS DENOMINATED IN A FOREIGN CURRENCY
SOVEREIGN WEALTH FUNDS: SATE OWNED ASSET MANAGEMENT COMPANIES THAT INVEST GOV SAVINGS OVERSEAS
6.3 GAINS FROM EFFICIENT INVESTMENT
2 CASES: A CLOSED ECONOMY: WHERE EXTERNAL BORROWING AND LENDING ARE NOT POSSIBLE: AN OPEN ECONOMY: WHICH BORROWING AND LENDING ARE POSSIBLE
PRODUCTION FUNCTION APPROACH
TECHNICAL EFFICIENCY: CONSTRUED NARROWLY AS A FUNCTION OF ITS TECHNOLOGY AND MANAGEMENT CAPABILITIES
SOCIAL EFFICIENCY: CONSTRUED TO BROADLY INCLUDE INSTITUTIONS, PUBLIC POLICIES, AND CULTURAL CONDITIONS SUCH AS LEVEL OF TRUST
6.4 GAINS FROM DIVERSIFICATION OF RISK
DIVERSIFICATION: COUNTRIES OWN INCOME STREAM FROM CAPITAL STOCK AND INCOME STREAMS FROM CAPITAL STOCKS LOCATED IN OTHER COUNTRIES
HOME BIAS: TENDENCY OF INVESTORS TO DEVOTE DISPROPORTIONATE FRACTION OF THEIR WEALTH TO ASSETS FROM THEIR OWN HOME COUNTRY
HOME BIAS PUZZLE: MANY DIFFERENT THEORIES PROPOSED
