International Political Economy: International Political Economy: Basic ConceptsBasic Concepts

I. What is IPE?I. What is IPE?

II. National IncomeII. National Income

III. TradeIII. Trade

IV. MonetaryIV. Monetary

I. What is IPE?I. What is IPE?IPE (from K&R):IPE (from K&R): ““The study of the intersection of The study of the intersection of politics and economics (states and markets) that politics and economics (states and markets) that illuminates the reasons why changes occur in the illuminates the reasons why changes occur in the distribution of states wealth and powerdistribution of states wealth and power ““ (p. 278)(p. 278)

Market:Market: economic structure where outcomes are economic structure where outcomes are determined by pricesdetermined by prices

Opportunity Cost: Opportunity Cost: tradetrade--off (loss) of ANY economic off (loss) of ANY economic decisiondecision

BIG Q:BIG Q: Which combination of state and market Which combination of state and market works best?works best?

World Scaled by PopulationWorld Scaled by Population

World Scaled by IncomeWorld Scaled by Income

II. National IncomeII. National Income

Gross Domestic Product: Gross Domestic Product: an estimate of the total an estimate of the total monetary value of all goods and services produced in a monetary value of all goods and services produced in a country in a given year.country in a given year.Gross National Product:Gross National Product: Same as above, but takes into Same as above, but takes into account foreign exchange (trade; foreign companies in account foreign exchange (trade; foreign companies in the US; US companies producing abroad)the US; US companies producing abroad)Per capita GDPPer capita GDP: Overall GDP divided by the : Overall GDP divided by the population population Purchasing Power Parity:Purchasing Power Parity: makes adjustments for costs makes adjustments for costs of living.of living.

The EconomistThe Economist’’ss ‘‘Big Mac IndexBig Mac Index’’

II. National IncomeII. National IncomeBusiness Cycle:Business Cycle: Regular up and down Regular up and down fluctuations of capitalist economies.fluctuations of capitalist economies.Inflation:Inflation: a sustained a sustained riserise in the general price in the general price level over time.level over time.Deflation:Deflation: a sustained a sustained fallfall in the general price in the general price level over time.level over time.Productivity:Productivity: value of output (production) per value of output (production) per units of input (materials; capital equipment; units of input (materials; capital equipment; labor, etc.).labor, etc.).

The Business CycleThe Business Cycle

III. Trade III. Trade –– Balance of PaymentsBalance of PaymentsCurrent Account (goods/services)Current Account (goods/services)

Merchandise Trade (Merchandise Trade (‘‘Trade balanceTrade balance’’))Service Trade (insurance, financial services, etc.)Service Trade (insurance, financial services, etc.)Investment Income (Interest)Investment Income (Interest)Government Transfers and SalesGovernment Transfers and Sales

(Exports = Credit; Imports = Debit)(Exports = Credit; Imports = Debit)

Capital Account (investment)Capital Account (investment)Investment Export ($Investment Export ($’’s invested abroad)s invested abroad)Investment Imports (investments into the US)Investment Imports (investments into the US)Foreign Currency Reserves Foreign Currency Reserves Statistical Discrepancy Statistical Discrepancy

(Exports = Debit; Imports = Credit)(Exports = Debit; Imports = Credit)

US Balance of Payments 2005US Balance of Payments 2005($ millions)($ millions)

Merchandise TradeMerchandise Trade --$781,642$781,642Service Trade Service Trade +$58,026+$58,026Investment IncomeInvestment Income +$1567+$1567Government Transfers and SalesGovernment Transfers and Sales --$82,896$82,896

CURRENT ACCOUNT BALANCECURRENT ACCOUNT BALANCE --$804,945$804,945

Capital ExportsCapital Exports --$491,729$491,729Capital ImportsCapital Imports +$1,292,395+$1,292,395Statistical DiscrepancyStatistical Discrepancy --$9626$9626

CAPITAL ACCOUNT BALANCECAPITAL ACCOUNT BALANCE +$791,010+$791,010

Source: US Bureau of Economic Analysis (www.bea.gov)Source: US Bureau of Economic Analysis (www.bea.gov)

IV. Monetary Policy IV. Monetary Policy ---- DomesticDomesticFiscal Policy:Fiscal Policy: Taxation and spending Taxation and spending Monetary policy:Monetary policy: money supply and interest rates money supply and interest rates Interest Rate:Interest Rate: the cost of borrowing moneythe cost of borrowing moneyFederal Reserve controls money supply via: Federal Reserve controls money supply via:

Discount Rate (Interest rate charged to banks)Discount Rate (Interest rate charged to banks)Reserve RequirementsReserve RequirementsOpen Market Operations (buy/sell Treasury bonds)Open Market Operations (buy/sell Treasury bonds)

IF want to EXPAND economy IF want to EXPAND economy Lower Interest Lower Interest Rates Rates IF want to CONTRACT economy (to fight IF want to CONTRACT economy (to fight inflation)inflation) Raise Interest RatesRaise Interest Rates

IV. Monetary Policy IV. Monetary Policy –– InternationalInternational

Exchange Rates:Exchange Rates: Price of a currency valued in Price of a currency valued in another currencyanother currency

Change in exchange rates change the price of Change in exchange rates change the price of imported/exported goodsimported/exported goods

Exchange rates and investmentExchange rates and investment

Portfolio Investment v. Foreign Direct Portfolio Investment v. Foreign Direct Investment (FDI)Investment (FDI)

No No ‘‘Giant Sucking SoundGiant Sucking Sound’’!!

Changes in Exchange Rates and TradeChanges in Exchange Rates and TradeDAY 1: DAY 1: ££ 1 (UK) = $1 (US)1 (UK) = $1 (US)

Bass Ale in UK costs Bass Ale in UK costs ££ 1 1

Budweiser in UK Costs Budweiser in UK Costs ££ 11Budweiser in US Costs $1Budweiser in US Costs $1

Bass Ale in US costs $1Bass Ale in US costs $1

DAY 2: DAY 2: ££ 1 (UK) = $2 (US)1 (UK) = $2 (US)FALL in $; RISE in FALL in $; RISE in ££

Bass Ale in UK costs Bass Ale in UK costs ££ 1 1

Budweiser in UK Costs 50pBudweiser in UK Costs 50pBudweiser in US Costs $1Budweiser in US Costs $1

Bass Ale in US costs $2Bass Ale in US costs $2