1. Topics in International Economics Ch 1. Introduction

2. Slide 1-2 T1: The U.S. as the largest debtor The US current account deficit increased to $144 billion in 2004:Q1 from $127billion in 2003:Q4. (US GDP in 2003: $11,000 billion) Why does it arise? Why does it matter?

3. Slide 1-3  Net international investment position declines each period by the amount of current account deficit.  As a result of large current account deficits in the 1980s and ’90s, the US became the largest debtor in the world.  NIIP of the US: -$2430 billion (2003) -$2233 billion (2002)  It is important to compare these numbers to the size of the economy.

4. Slide 1-4 T2:The euro  The euro, introduced in 1999, became the currency of 12 EU members. Germany, France, Italy, Belgium, Netherlands, Luxemburg, Ireland, Spain, Portugal, Austria, Finland, Greece  What are the benefits and costs of the monetary union (giving up own national currencies and adopting a common currency)?  Why did the UK, Sweden, and Denmark opt out?

5. Slide 1-5 Dollarization  In a different context, El Salvador has adopted the US dollar as legal tender.  A new meaning of dollarization  Why would any country want to give up its own currency and adopt some other country’s currency?

6. Slide 1-6 T3: Exchange rate movements Yr:Mo ¥ /$Yr:Mo € /$ 1968:07360.01999:010.88 1978:10176.01999:121.00 1985:02259.52001:051.18 1997:04126.92003:120.79 1998:07143.72004:080.83 2004:08111.42005:010.73 2005:01103.4  Exchange rate movements have been large.  Can we explain them?  Are flexible exchange rates more desirable than fixed rates?  http://www.x-rates.com/ http://www.x-rates.com/

7. Slide 1-7 T4: Financial Crises  Currency crises became more frequent. ERM (exchange rate mechanism), 1992 Mexico, 1994 East Asia, 1997  Big devaluations and subsequent economic collapses  How to explain currency crises? How to prevent them?

8. Slide 1-8 T5: Choice of exchange rate regime  Chinese Renminbi had been pegged to the US dollar since 1994 until recently.  Large trade surpluses of China became a political issue.  The US government and many economists recommend increased exchange rate flexibility.  China revalued the RMB from 8.28 to 8.11 yuan per USD on July 22, 2005. The currency has been on managed float ever since.  What kind of exchange rate system would be most appropriate for China?