11. International economic issues

If a resident buys shares in a foreign firm, the asset purchase is a financial-account outflow. Later dividends received from those shares are current-account primary-income credits. The asset and its income therefore belong to different accounts.

A current-account deficit must be financed by net capital/financial inflows, reserve use or an accounting discrepancy. Double-entry accounting makes the full BOP balance in principle, but an individual account can show a persistent imbalance and financing can be unsustainable.

For an unwanted current-account surplus, reverse the relevant pressure: appreciation, lower trade barriers/export support, or expansionary demand policy can raise imports/reduce net exports. The choice still depends on inflation, capacity and the reason the surplus exists.

With a fixed exchange rate, a domestic interest-rate rise can reduce imports and attract capital, improving current and financial accounts; under a float the resulting appreciation may later weaken exports. The same instrument therefore has account and regime-specific effects.

For a current-account surplus, switching measures can be reversed by removing export subsidies/protection or allowing appreciation; reducing policy is generally the wrong direction if the aim is to increase imports, while expansionary demand can reduce the surplus by raising import spending.

Choose by cause and parameters. Switching is stronger when export/import demand responds to relative prices and domestic supply can expand. Reducing is relatively stronger when price elasticities are low but the marginal propensity to import is high. Persistent structural deficits often need supply-side improvement; overheating deficits may respond faster to demand restraint.

A tariff raises the relative price of imports and switches some demand to domestic goods. A rise in income tax lowers disposable income and spending on both domestic and imported goods. Both may reduce imports, but only the first is classified by changing relative choice.

Always state the quotation. If E is domestic currency per unit of foreign currency, a rise in E is a nominal depreciation and a common real-rate convention is RER = E x P_foreign / P_domestic; a rise is a real depreciation. If the quotation is reversed, the interpretation/formula direction reverses too.

Base index 100: 80% of trade is with partner A and the currency rises 10% against A; 20% is with B and it rises 50%. Weighted change = 0.80 x 10% + 0.20 x 50% = 18%, so the new simplified index is 118.

If a fixed rate is set above the market equilibrium under a domestic-currency-per-foreign quotation convention, translate carefully; in any diagram identify whether the official price creates excess demand or supply for the named currency, then make the authority absorb that gap. Never choose buy/sell action from 'above' alone without reading axes.

A peg gives predictable trade prices and possible anti-inflation credibility, but consumes reserves and monetary autonomy. A managed float needs less continuous defence and absorbs some shocks through the rate, but offers less certainty and still requires reserves/credibility.

Revaluation makes imports cheaper and exports less competitive; devaluation tends to reverse those effects, subject to elasticities, imported inputs, debt currency and policy credibility.

If a government changes a peg from 1 unit = $1.20 to$1.30, the currency has been revalued under that quotation; changing it to $1.10 is a devaluation.

When an overvalued fixed rate with a persistent deficit is released to float, excess currency supply may cause depreciation: competitiveness may improve, while imports and foreign-currency debt become dearer. If the prior parity was undervalued/surplus pressure dominates, the float may appreciate instead.

Under a fixed rate, higher domestic inflation than partners weakens export competitiveness and raises imports, creating pressure to devalue. Maintaining the parity instead may require reserve loss and contractionary policy, shifting the burden to output and unemployment.

Evaluate regime change by reserve adequacy, inflation credibility, trade exposure, capital mobility, financial balance sheets, shock type and institutional commitment. Certainty benefits traders; autonomy helps respond to domestic shocks.

If |PED_X| = 0.7 and |PED_M| = 0.6, the sum is 1.3, so the condition is met. Export quantities rise and import quantities fall enough, in value terms under the model assumptions, to outweigh the immediate price change.

For appreciation/revaluation, reverse the long-run direction: when the condition holds, exports weaken and imports rise, tending to worsen a deficit or reduce a surplus. With low short-run elasticities, the current-account value may initially move in the opposite direction before quantities adjust.

A single label can hide regional, gender or rural differences. Compare the indicator, threshold, date and population covered before drawing a conclusion.

Two economies with similar income per person may differ greatly in life expectancy or schooling; one may be more developed on a human-capability measure even if the income rank is similar.

The bands are useful for broad eligibility, finance and comparison, but two economies in one band can differ in poverty, inequality, health, education, informal/subsistence output, public services and environmental conditions.

An economy can cross into a higher income band because average GNI per head rises while median income, rural services or wealth distribution barely improve. Its income classification changed; a full development judgement still requires other indicators.

Monetary comparisons can mislead because of income/wealth distribution, informal/subsistence/unpaid activity, different price baskets and data quality, exchange-rate volatility, output composition, pollution/resource depletion, leisure/working hours, public services and population structure. Use real per-capita and PPP measures, then add distributional and non-monetary evidence.

Non-monetary indicators include life expectancy, infant/child mortality, nutrition, literacy/schooling, access to healthcare, safe water, sanitation, electricity and housing, employment/security, environmental quality and freedom/capabilities. Each needs a precise definition and disaggregated coverage.

The Kuznets curve is an inverted-U hypothesis: inequality on the vertical axis initially rises as income per capita/development on the horizontal axis increases, reaches a turning point, then falls as structural change, education, political redistribution and wider opportunities spread gains. It describes a possible historical relationship, not an automatic law or proof of causation.

Over time: use the same real per-capita measure/base, calculate percentage change, then check distribution, employment, health/education and environmental sustainability. Between countries: compare levels as well as growth rates, use PPP for price differences, align year/definitions and add non-monetary/composite evidence.

If nominal national income rises 5%, prices rise 4% and population rises 2%, approximate real income per head changes by 5 - 4 - 2 = -1%. Aggregate money income grew, but average real purchasing power fell slightly.

Country A has real income per head 40,000 growing 1%; B has 10,000 growing 6%. B is catching up faster but remains lower in level. Development improves more plausibly when gains reach labour-intensive employment, basic services and broad households rather than relying only on finite-resource extraction.

Urbanisation rises through rural-urban migration, natural increase in towns and reclassification of settlements. It can improve agglomeration, jobs and service access, but rapid unplanned growth can create congestion, housing/infrastructure shortages, pollution and informal employment while rural areas lose workers.

A is the area between the equality line and Lorenz curve; B is the area under the Lorenz curve within the equality triangle. If source areas are labelled X and Y, identify geometry rather than letters: numerator is the inequality gap and denominator is the whole triangle below equality.

More progressive direct taxes, targeted transfers, minimum wages or broader education/asset access may reduce post-policy inequality; regressive indirect taxes, weaker inheritance/capital-gains taxation or long-term unemployment may increase it. The observed effect depends on behavioural responses and whether data are pre/post tax and income or wealth.

Mechanisation can reduce agricultural employment while farm output rises; released workers may enter manufacturing/logistics. A falling primary employment share therefore does not prove primary output fell, and an expanding service share must be evaluated by productivity and job quality.

Evaluate importance against the recipient's binding constraint and the counterfactual: grants for productive, locally owned projects with maintenance and accountable delivery are more likely to raise long-run living standards than debt-financed consumption or donor-led projects with weak local capacity.

Both partners can gain when exchange uses comparative advantage and contracts are fulfilled: for example, seasonal workers fill a labour shortage while remitted wages benefit home households. Infrastructure investment can raise both countries' trade capacity, but imported construction inputs, tied loans and repayment can shift gains.

For any case, trace (1) immediate AD and foreign-exchange flows, (2) productive-capacity and skill effects, (3) domestic supplier/job/tax linkages, and (4) later import, profit, interest and wage outflows.

MNCs may build or acquire factories, extract resources, organise global supply chains, contract local suppliers, transfer technology/management, train workers, sell locally and export. These activities usually involve FDI, but MNC describes the firm while FDI describes the investment flow/asset.

Judge net contribution by local value added, worker/supplier linkages, technology retained, taxes collected, reinvestment, competition and external costs—not by gross MNC sales. Host tax, labour, environmental and local-content rules alter each channel.

Investors consider market size, infrastructure, skills/productivity, political/currency stability, costs, tax/rules and ability to repatriate profit. Low wages and cheap land may not compensate for unreliable transport, power or institutions.

Assess standard-of-living effects through employment/income, public revenue and services, consumer choice, distribution and environmental/non-material costs. An observed FDI-growth correlation alone does not establish causation.

Judge sustainability using debt and debt service relative to GNI/government revenue/export earnings, real growth versus effective interest cost, maturity/rollover profile, currency denomination, reserve access and project returns. A smaller debt-to-GNI ratio can occur even when nominal debt rises if GNI grows faster.

A programme provides foreign exchange and credibility subject to agreed policy conditions and repayment. Fiscal, monetary, exchange-rate or structural measures aim to reduce the financing gap and restore sustainability rather than finance a permanent deficit.

A well-selected water, transport, health or education project can improve human capital, productivity, market access and potential growth. Weak selection, corruption, tied/import-intensive construction, displacement, environmental harm or missing maintenance can leave debt without durable benefits.

It can expand markets, specialisation, competition and knowledge transfer, but can also transmit shocks, intensify inequality, weaken bargaining power or increase environmental pressure. Effects differ by sector, country and group.

A global supply chain can lower consumer prices and spread production know-how, yet a port closure or financial shock can disrupt several countries at once.

Deeper integration is not automatically better: compare market size/complementarity, creation versus diversion, mobility and adjustment support, common-policy fit, non-tariff rules and the value placed on national policy autonomy.

Use three steps: (1) add the old/new ad valorem or specific tariff to each foreign price; (2) choose the cheapest available supplier before and after integration; (3) compare suppliers' pre-tariff resource costs. Domestic-to-cheaper-member is creation; cheaper-outsider-to-costlier-member is diversion. Both can occur across different products.

In the standard small-country tariff-removal diagram, the domestic price falls from tariff-inclusive import price to the lower partner price. Quantity demanded rises, domestic supply falls and imports expand. Consumer surplus rises; domestic producer surplus and government tariff revenue fall. The two net welfare-gain triangles are the production-efficiency gain plus consumption-efficiency gain.