Chapter 6: Balance of Payments 1: The Gains from Financial Globalization Flashcards
Long-Run Budget Constraint (LRBC)
Tells us precisely how and why a country must, in the long run, “live within its means”
Small Open Economy
The country trades goods and services with the rest of the world through exports and imports and can lend or borrow overseas, but only by issuing or buying debt (bonds). Because it is small, the country cannot influence prices in world markets for goods and services
World Real Interest Rate (r*)
The long-run real interest rate that all debt carries, which we assume to be constant
Present Value
The present value of X in period N is the amount that would have to be set aside now so that, with accumulated interest, X is available in N periods
Perpetual Loan
An interest-only loan, or, equivalently, a sequence of loans for which only the principal is refinanced or rolled over every year
Exorbitant Privilege
The US acts as a bank to the rest of the world and thus receives a higher interest rate on its assets than it pays on its liabilities.
The US receives interest at r* but has to pay interest at r0 < r*
Manna from Heaven
The USA has long enjoyed positive capital gains (KG) on its external wealth
Sudden Stop
A borrower country sees its financial account surplus rapidly shrink (suddenly, nobody wants to buy any more of its domestic assets)
Precautionary Saving
An economic strategy whereby the government acquires a buffer of external assets (a “rainy day” fund)
Rather than allowing external wealth to fluctuate around an average of zero (with the country sometimes being in debt and sometimes being a creditor), the country maintains a higher positive “average balance” in its external wealth account to reduce or even eliminate the need to go into a net debt position.
This approach is costly, but a poor country may deem the cost to be worthwhile.
A country can do this by accumulating foreign reserves or having sovereign wealth funds
Sovereign Wealth Funds
A method of precautionary saving
A state-owned asset management company that invest some government savings overseas
Marginal Product of Capital (MPK)
The additional output resulting from the use of an additional unit of capital
Production Function
Relates physical output of a production process to physical inputs or factors of production
Divergence
Once we allow for productivity differences, investment will not cause poor countries to reac hthe same level of capital per worker or output per worker as rich countries. Unless poor countries can lift their levels of productivity (raise A), access to international financial markets is limited
Technical Efficiency
A function of a country’s technology and management capabilities
Social Efficiency
May largely determine productivity (A), and is constructed broadly to include institutions, public policies, and even cultural conditions such as the level of trust.
