This is the second of the three courses part of the Globalization, Economic Growth and Stability Specialization. This course will focus on facets of globalization that affect a country´s economic perspectives and decisions. Globalization has recently been the predominant subject in many political debates, and this course will go into the determinants of globalization. It will be separated into four modules; the first module will explain exchange rates. It will cover what determines exchange rate and how different exchange rates affect the economy and the reality of currencies. The second module will explore trade, the reality of free trade, and what occurs to a country´s economy with protectionism. The third module will go into the balance of payments, it will help you understand how economic transactions between a country and the rest of the world work. The fourth module will focus on Immigration, which is probably one of the most controversial subjects today. It will explain how migration affects host countries and it will cover current migration trends.
The Current Account and National Growth Models
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Del curso dictado por IE Business School
Trade, Immigration and Exchange Rates in a Globalized World
37 calificaciones
IE Business School
37 calificaciones
Curso 2 de 3 en SpecializationGlobalization, Economic Growth and Stability
De la lección
Balance of Payments
Conoce a los instructores
Gayle AllardProfessor
Economics
[MUSIC]
We've looked at three current account deficit,
excuse me current account surplus countries.
Now let's turn to a couple of current account deficit countries.
We're going to start with India.
India has a chronic current account deficit.
It is a saving country in the private sector.
Remember, we've got private savings and public savings.
So Indians do tend to save, but the government is a chronic net borrower and
this pushes overall net borrowing in the economy into negative numbers,
which causes India to be a current account deficient country.
Its current account deficit has been declining.
What we need to remember about India, the fact that it
has this current account deficit means that it can drive its own growth.
Once again, C plus I plus G is bigger than GDP.
So India consumes all that it produces and then some.
It doesn't need the rest of the world to make it grow.
India did actually,
because of this chronic balance of payment deficit, it had a balance of payments,
excuse me, current account deficit not balance of payment deficit.
Because of this chronic current account deficit,
it had a balance of payments crisis in 1991.
And if you think about that T,
our balance of payments that we talked about just a short while ago.
Remember, we've got the current account on the left,
the financial account on the right, they need to balance.
So if I have a negative on the left, I must have a positive on the right.
If I import more than I export, I have to have somebody
willing to put money into my country in investments or
loans as we talked about earlier.
India in 1991 reached a point where the negative on the left hand side on
the current account, could not be matched by a positive on the right-hand side.
In other words, foreigners were not putting money into the country in large
enough volumes that it could finance its current account deficit.
Therefore, it had to go and get loans and it actually went to Switzerland,
to the United Kingdom, took them its gold and asked for loans in exchange.
So, this can happen, it's rare, but India is one of the large countries that has had
a balance of payments crisis because the financial accounts surplus was not
big enough to cover the current account deficit.
India now has been able to maintain that current account deficit year after year.
We have to remember that it is constantly borrowing and that doesn't mean
necessarily the government, it means the whole economy, corporations, households,
and/or government, are borrowing to finance this current account deficit.
At the same time, India's much less vulnerable to
changes in demand in the rest of the world or changes in the value of its currency,
than a country like, say, China or Japan, okay?
So the India is one of the countries with the chronic current account deficit.
The country with the largest current account deficit in the world in absolute
terms is United States.
The United States has had [COUGH] a current account deficit
almost every year since 1980.
Now before that, it was a current account surplus country, but
now it is a chronic current account deficit country.
Where this had come from?
Well, it's easy for you to imagine knowing the determinants of the current account
deficit, it has a low savings rate, it's a country whose currency people want to
hold and it has an attractive investment environment, so there are lots of inflows.
It has strong growth rates compared to many of the many other developed
countries, which keep consumption going, and it is a world reserved currency.
So all of these things tend to drive the Unites States current account deficit.
Now remember, that GDP is C plus I plus X minus M,
we subtract off the M and if imports are very big, that actually reduces US GDP.
So remember, US GDP would be larger without this deficit.
United States is a net international debtor, because every year that it has
a current account deficit, a negative on the left hand side, it has to have
a financial account surplus, a positive on the right hand side.
Which means it has to be borrowing from the rest of the world, or
selling its assets to the rest of the world.
So this happens year after year, you're accumulating debt year after year.
Eventually, what you owe the rest of the world becomes larger than
the size of your assets.
However, the cost of this debt is low.
Foreigners are always willing to lend money to the United States and the reason
they want to lend money to the United States is so that we'll continue spending.
The United State's is the world's great, hungry, consuming machine.
And everybody wants that machine to help them to grow through their own current
account surplus,
coz if they have them through their exports if they have deficits.
So what we find is the US, is an important driver of global growth
because of these large and chronic current account deficit.
[MUSIC]
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