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International Finance

Chapter 1
Introduction

Learning Objectives
1.1 Distinguish between international and domestic
economic issues.
1.2 Explain why seven themes recur in international
economics and discuss their significance.
1.3 Distinguish between the trade and monetary aspects
of international economics.

KTQT: là cách các quốc gia trao đổi hàng hóa, dịch vụ và tiền bạc
Preview
Gains from trade:
• What is international economics about? 1. Buy what they can't make easily
Ex: Norway can't grow oranges easily, so it buys them from Spain
• International trade topics: Gains from trade, explaining
patterns and volume of trade, effects of government 2. Specialize in what they do best
policies on trade Ex: Japan is good at making cars, so it focuses on that and trades for other things
• International finance topics: Balance of payments, 3. Export what they have a lot of; import what they lack
exchange rate determination, international policy Ex: Saudi Arabia has lots of oil but not much food
coordination, capital markets --> exports oil, imports food
• International trade versus finance 4. Produce more efficiently on a large scale
Ex: China makes millions of phones --> cheaper prices

5. Trade money or goods now for future benefits (borrowing/lending)

Ex: Vietnam borrows money from other countries to build roads and pays back
later

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What Is International Economics

About? (1 of 3)

• International economics is about how nations interact

through trade of goods and services, flows of money,
and investment.
• International economics is an old subject, but continues
to grow in importance.
• Nations are now more closely linked than ever before.

What Is International Economics

About? (2 of 3)

• U.S. exports and imports as shares of gross domestic

product have been on an upward trend.
– International trade has roughly tripled in importance
compared to the economy as a whole in the past 60
years.
– Both imports and exports fell substantially in 2009
due to the recession.
– Both imports and exports fell again in 2020 due to
the COVID-19 pandemic.

Figure 1.1 Exports and Imports as a

Percentage of U.S. National Income

(Shaded areas indicate U.S. recessions.) Both imports and exports have
risen as a share of the U.S. economy, but imports have risen more.

Source: U.S. Bureau of Economic Analysis, research.stlouisfed.org

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What Is International Economics Mỹ ít phụ thuộc vào international trade hơn các quốc gia khác
About? (3 of 3)
vì tụi nó lớn và có đa dạng các resources khác nhau để khai
• Compared to the United States, other countries are even
more tied to international trade.
thác
– Their imports and exports as a share of GDP are
substantially higher.
– The United States, due to its size and diversity of
--> Các quốc gia khác thì bị phụ thuộc nhiều hơn
resources, relies less on international trade than
almost any other country.

Figure 1.2 Average of Exports and Imports

as Percentages of National Income in 2018

International trade is even more important to most other countries than

it is to the United States.
Source: World Bank

The Gains from Trade (1 of 4)

• The most important insight of all international economics
is that there are gains from trade.
• Countries selling goods and services to each other
almost always generate mutual benefits.

1. When a buyer and a seller engage in a voluntary

transaction, both can be made better off.
▪ Norwegian consumers import oranges that they
would have a hard time producing.

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The Gains from Trade (2 of 4)

2. How could a country that is the most (least) efficient
producer of everything gain from trade?
▪ Countries use finite resources to produce what
most productive at (compared to their other
production choices), then trade those products for
what they want to consume.
▪ Countries can specialize in production, while
consuming many goods and services through
trade.

The Gains from Trade (3 of 4)

3. Trade benefits countries by allowing them to export
goods made with relatively abundant resources and
imports goods made with relatively scarce resources.
4. When countries specialize, they may be more efficient
due to large-scale production.
5. Countries may also gain by trading current resources
for future resources (international borrowing and
lending) and due to international migration.

The Gains from Trade (4 of 4)

• Trade is predicted to benefit countries as a whole in
several ways, but trade may harm particular groups
within a country.
– International trade can harm the owners of resources
that are used relatively intensively in industries that
compete with imports.
– Trade may therefore affect the distribution of income
within a country.

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Trade patterns depend on:

The Pattern of Trade
- Climate and natural resources
• The pattern of trade describes who sells what to whom.
• Differences in climate and resources explain why Brazil - Labor productivity
exports coffee, and Saudi Arabia exports oil.
• But why does Japan export automobiles, while the U.S. - Amounts of land, labor, and capital
exports aircraft?
• Why some countries export certain products can stem from
differences in:
– Labor productivity
– Relative supplies of capital, labor, and land and their
use in the production of different goods and services

Effects of Government Policies on

Trade (1 of 2)

• Policy makers affect the amount of trade through

– Tariffs: a tax on imports or exports,
– Quotas: a quantity restriction on imports or exports,
– Export subsidies: a payment to producers that
export, or
– Through other regulations (e.g., product
specifications)
that exclude foreign products from the market, but still
allow domestic products.
• What are the costs and benefits of these policies?

Effects of Government Policies on Less Trade = Less Choice for Consumers

Trade (2 of 2)

• If a government restricts trade, what are the costs if )JHIFS
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foreign governments respond likewise?
• Trade policies are often chosen to cater to special
interest groups, rather than to maximize national welfare. -FTT
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• Governments tend to adopt tariffs, then negotiate them
down in exchange for reduction in trade barriers of other
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countries.
Nâng thuế cao --> sau đó trao đổi lại quyền lợi rồi giảm thuế sau

U.S. says to Europe: "We’ll lower our car tariffs if you lower your Global Tension and Uncertainty
food tariffs." Businesses don’t want to invest if they don’t know what the rules will be
Both sides agree → trade becomes freer → both benefit.

- Trade restrictions hurt everyone, but help some special groups.

- Countries often start with high tariffs, then make deals to lower them together.

- Trade wars cause higher prices, fewer jobs, and more problems.
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money flows are just as important as goods in international trade.

International Finance Topics
• Exchanging risky assets such as stocks and bonds can
benefit all countries by diversification that reduces the
- Monetary events matter: Changes in interest, inflation,
variability of income—another source of gains from trade. or exchange rates affect trade
• Most international trade involves monetary transactions.
• Many monetary events have important consequences for If the U.S. raises interest rates:
international trade.
- Investors move money to the U.S. to earn more.

- Vietnamese đồng loses value.

- It becomes more expensive for Vietnam to import U.S. goods.

- But easier to export because Vietnamese goods become cheaper to foreigners.

Financial liberalization is unavoidable --> open for trade --> open for financial market --> = trade liberalization
--> we can not avoid transaction cost - the spread in exchange rate (we export, we sell dollar to Vietcombank) -->

- Trade deficit: We import more than we export (we buy more than we sell).
Balance of Payments
- Official settlements balance: How much money the central bank has to use for
• Governments measure the value of exports and imports,
as well as the value of financial assets that flow into and international payments.
out of their countries. + Example: If Vietnam needs to pay for imports but doesn't earn enough from
– Trade deficits, where countries import more than they
export in value, may be offset by net inflows of exports, the central bank may use U.S. dollar reserves to make up the difference.
financial assets.
• The official settlements balance, or the balance of
payments, measures the balance of funds that central - National income accounts: Records all of the above to measure economy
banks use for official international payments. --> Financial report for the whole economy
• All three values are measured in the government’s
national income accounts.

Balance of payment T- accounts

<0
+ - => Trade balance
>0
=> Financial balance

We import goods from China --> if exchange rate change --> the cost of import change
Exchange Rate Determination --> we have to pay more or less

- Devaluate our domestic currency --> our good will relatively cheap --> manipulation
• Exchange rates are an important financial issue for most
governments. the main topic of this course --> Do we have currency manipulation (15.000 or 25.000)? --> Trump said our currency
is only 15.000 not 25.000
• Exchange rates measure how much domestic currency
can be exchanged for foreign currency and thus affect
how much: 1 dollar = 25.00 dong
– Goods denominated in foreign currency (imports) cost
in the domestic country. iPhones more expensive, coffee exports increase
– Goods denominated in domestic currency (exports)
cost in foreign markets.
• Some exchange rates change continually (float) while
others are fixed for periods of time.
Is Vietnam follow the fixed or the floating?

Dirty floating system --> in VN, the manage dirty floating system --> fix but allow for minor change in exchange rate
--> Answer further in Chap 7

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International Policy Coordination

- Integrated economy means: Countries are closely connected through trade, finan
• In an integrated economy, one country’s economic
policies usually affect other countries as well, leading to and investment.
the need for some degree of policy coordination.
– Depends on type of exchange rate regime.
• Capital markets, where money is exchanged for promises --> If they follow fixed or floar regime is different
to pay in the future, have special concerns in an
international setting:
BRI (Belt and Road innitiative) of China --> reallocate the world supply chain
– Currency fluctuations can alter the value paid.
If developing countries is not awake --> they will fall into the debt trap of China
– Countries, especially developing ones, might default
on debt.
If we allow VND to freely float --> debt payment will change
--> VN is paying foreign debt --> 10 bill dollars
--> 1 dollar depreciate by 10% --> our debt burden increase by 10%

- If we rely on external lending --> make sure how much will lend and pay
--> Be careful of the ODA --> increase of inflation --> change of exchange rate
--> at the end we face a big debt

The International Capital Market

• Capital markets are arrangements by which individuals
and firms exchange money now for promises to pay in
the future.
• International capital markets cope with special
regulations that countries impose on foreign investments.
– Special risks of currency fluctuations and national
default and
– Sometimes offer opportunities to evade regulations
placed on domestic markets.

International Trade Versus Finance

• International trade focuses on transactions involving
movement of goods and services across nations.
– International trade theory (Econ/Trade Chapters
2–8) and policy (Econ/Trade Chapters 9–12).
• International finance focuses on financial or
monetary transactions across nations.
– International monetary theory (Econ Chapters
13–18/Finance Chapters 2–7) and policy (Econ
Chapters 19–22/Finance Chapters 8–11).