EC 102.01Final Exam – Aug 8, Monday 17:30 – 20:00 NH 105 : ACAR – ISIK NH 405 : INAM – YILDIZ Exam will be comprehensive, including all material before

Midterm 2 + new topics:Ch 12 – ALLCh 14 – Section 2, Section 3, Section 4Ch 13 – Section 1 (1.1, 1.2), Section 3, Section 4Ch 15 – Section 2, Section 3Any Additional Material uploaded on course website

OutlineMacroeconomic Issues and ApplicationsCh 13 – The Global Economy

Section 4 – International FinanceCh 15 – Macroeconomic Challenges for 21st C

Section 2. Macroeconomics and Human Development Section 3. Macroeconomics and Ecological Sustainability

International FinanceDiscussed so far trade in goods&services; need to

consider flows of income, assets, foreign currencyExchange rate – the number of units of one currency

that can be exchanged for a unit of another currency; e.g. 1 USD = 1.69 TL; 1 USD = 1.42 EUR

PPP – under certain idealized conditions (free trade of currencies, no transportation costs, immediate response of the markets etc.), ER reflect differences in purchasing power of across countries

PPP adjustment – taking into account cost of living variations

International FinancePPP - identical good should cost same in all nations

(assuming no transportation costs and trade barriers)

Big Mac Index – primitive BUT used to determine extent to which market exchange rate differs from equilibrium exchange rate, useful predictor for exchange rate movements.

Foreign Exchange MarketsER – price of foreign

currency, can use supply-demand framework

Supply – determined by domestic residents; exports of HC; foreign investment in HC; transfer payments to HC.

Demand – determined by foreign residents; imports of HC; foreign investment by HC; foreign transfer payments

Foreign Exchange MarketsSpeculation - attempt to profit by trading on

expectations about prices in the futureDepreciation – weakening of the currency

Appreciation – strengthening of the currency

Also need to take into account the levels of inflation across countries =>RER

Balance of PaymentsFlows of payments into and out of a country –

inflows and outflows arising from trade, earnings, transfers, asset transactions

Inflows: receipt of payments from foreign source merchandise exports transportation & travel receipts gifts from foreign residents investment in HC by foreign residentsOutflows: payments to foreign source merchandise imports transportation & travel expenditures gifts to foreign residents foreign investment by residents of the HC aid given by home country government

Balance of PaymentsBOP = CA + KA = 0Current Account (CA)Monetary value of transactions in goods, services,

income flows and unilateral transfersFinancial (Capital) Account (KA)International purchases & sales of real estate, stocks

& bonds, government securities and commercial bank deposits

Statistical DiscrepancyImpossible to fully collect accurate and precise

information; need to make correcting entry with a residual

Turkey: Balance of Payments - 2008  ANALYTIC PRESENTATION * 1975 1980 1985 1990 1995 2000 2005 2006 2007 2008 2009 A- CURRENT ACCOUNT -1.648 -3.408 -1.013 -2.625 -2.339 -9.920 -22.309 -32.249 -38.434 -41.959 -13.9911. Exports f.o.b. 1.401 2.910 7.959 12.959 21.636 30.825 78.365 93.613 115.361 140.800 109.6472. Imports f.o.b. -4.502 -7.513 -10.935 -22.407 -34.788 -52.882 -111.445 -134.669 -162.213 -193.821 -134.497  Balance on Goods -3.101 -4.603 -2.976 -9.448 -13.152 -22.057 -33.080 -41.056 -46.852 -53.021 -24.8503. Services: Credit 617 762 3.160 8.083 14.939 19.463 26.898 25.549 28.930 35.071 33.4664. Services: Debit -436 -569 -1.560 -3.117 -5.319 -8.088 -11.742 -11.994 -15.647 -17.760 -16.717  Balance on Goods and Services -2.920 -4.410 -1.376 -4.482 -3.532 -10.682 -17.924 -27.501 -33.569 -35.710 -8.1015. Income: Credit 0 0 298 917 1.488 2.836 3.644 4.418 6.423 6.889 5.1646. Income: Debit -165 -1.169 -1.851 -3.425 -4.693 -6.838 -9.483 -11.074 -13.531 -15.251 -13.353

 Balance on Goods, Services and Income -3.085 -5.579 -2.929 -6.990 -6.737 -14.684 -23.763 -34.157 -40.677 -44.072 -16.2907. Current Transfers 1.437 2.171 1.916 4.365 4.398 4.764 1.454 1.908 2.243 2.113 2.299B. CAPITAL ACCOUNT                 -8 -60 -42C. FINANCIAL ACCOUNT 327 672 1.065 4.037 4.565 9.584 42.685 42.689 48.700 34.558 9.7568. Direct Investment Abroad 0 0 0 16 -113 -870 -1.064 -924 -2.106 -2.549 -1.5539. Direct Investment in Turkey 114 18 99 684 885 982 10.031 20.185 22.047 19.504 8.40910. Portfolio Investment- Assets 0 0 0 -134 -466 -593 -1.233 -3.987 -1.947 -1.244 -2.71111. Portfolio Investment- Liabilities 0 0 0 681 703 1.615 14.670 11.402 2.780 -3.770 2.93811.1. Equity Securities 89 195 489 5.669 1.939 5.138 716 2.82711.2. Debt Securities 592 508 1.126 9.001 9.463 -2.358 -4.486 11112. Other Investment- Assets 0 85 127 -409 -383 -1.939 -553 -13.479 -4.969 -12.058 10.98512.1. Monetary Authorities -255 361 -102 1 -16 0 2 2 212.2. General Government -42 -116 -32 -3112.3. Banks 382 -769 -281 -1.574 -149 -11.018 -3.389 -10.255 6.40012.4. Other sectors -1 0 -366 -388 -2.419 -1.466 -1.773 4.61413. Other Investment- Liabilities 213 569 839 3.199 3.939 10.389 20.834 29.492 32.895 34.675 -8.31213.1. Monetary Authorities -36 -535 1.556 619 -787 -1.268 -1.450 -1.791 -90113.2. General Government -874 -393 -2.131 117 -2.165 -712 82 1.742 1.60213.3. Banks 326 2.279 1.973 3.736 10.524 11.704 3.736 9.457 51413.4. Other sectors     1.423 1.848 2.541 5.917 13.262 19.768 30.527 25.267 -9.527

Current, Capital and Financial Account -1.321 -2.736 52 1.412 2.226 -336 20.376 10.440 10.258 -7.461 -4.277D. NET ERRORS AND OMMISSIONS -351 1.434 -837 -468 2.432 -2.661 2.824 185 1.757 4.703 5.068  GLOBAL BALANCE -1.672 -1.302 -785 944 4.658 -2.997 23.200 10.625 12.015 -2.758 791E. RESERVE ASSETS 1.672 1.302 785 -944 -4.658 2.997 -23.200 -10.625 -12.015 2.758 -79114. Official Reserves 337 -494 360 -896 -5.005 -354 -17.847 -6.114 -8.032 1.057 -11115. Use of Fund Credits and Loans 300 423 -251 -48 347 3.351 -5.353 -4.511 -3.983 1.701 -68016. Exceptional Financing 1.035 1.373 676                

Macroeconomic Policy in an Open Economy

Remember our macroeconomic model with closed economy (NX = 0); MP operates over i and I for Y

Open economy: Now any change in MP is more effective because of ER interactions

Exchange Rate RegimesUp to now, we assumed that ER is determined by

market forces (S&D) => flexible/floating ER regimeuncertainties, need for a more stable and predictable

environment for trade (depreciation/appreciation)

Fixed ER Regime => currencies are traded at fixed ratios; “pegged”; no independent MP because CB intervenes on money markets to keep ER fixed

Devaluation / revaluation by FX market intervention and K controls

Macroeconomics and Human Development

Previously discussed on “development” beyond a focus on GDP, productivity and industrialization

“people centred development”, “development with a human face”, “socially sustainable development”

Human Development - proposed by UNDPAmartya Sen – capabilities approachEvaluating institutions, policies and actions

according to the opportunities (or freedoms) they give people for valuable ways of living

Macroeconomics and Human DevelopmentMain question: “what do we really want from

development?”Shifting the focus of attention from measures of

income and wealth towards opportunities for health and participation in the society.

“creating an environment in which people can develop their full potential and lead productive, creative lives in accordance with their needs and interests”

Basic needs + other dimensions of a worthwhile life

Macroeconomics and Human DevelopmentHuman development vs. Economic DevelopmentAs discussed before, combination of measures of

life expectancy, literacy and GDP per capita.At least some key goods and services are needed

for human development to occur – e.g. health-related interventions in Africa.

At high levels of income, other dimensions are important (freedom from violence, investments in productive and creative capacities of next generation, care services enhancing participation of both receivers and caregivers...)

Macroeconomics and Human DevelopmentMillenium Development Goals – declared by Un in

2000; focusing on improvement in the lives of the very poorest people in the world

8 main goals, with 2015 deadline for achievement- Eradicate extreme poverty and hunger (halve population below

1$-a-day income)- Achieve universal primary education- Promote gender equality and empower women- Reduce child mortality (under-5 mortality rate by 2/3)- Improve maternal health (maternal mortality ratio by 3/4)- Combat HIV, malaria and other diseases- Ensure environmental sustainability- Partnership for development

Major Environmental IssuesEconomic growth accompanied with both increasing

demand for natural resources + waste and pollution- Global population: drastic increase in population,

pressures to environmental issues – esp. Food production (land degradation, pollution from fertilizers etc.)

- Resource depletion: fisheries, tropical forests, stocks of mineral resources

- Pollution and wastes: rich countries creating two-thirds of global waste

- Climate change: “lagged”, most drastic impacts will occur in the next few decades + effects disproportionately falling on the developing countries

Economic Growth and EnvironmentEconomic development may reduce environmental

damages per capita – move towards service based economy etc.

Environmental quality – “normal good”: people will demand more when get richer

Environmental Kuznets Curve (EKC) – inverted U-shaped relationship between economic development and environmental damages

Seem to hold for some pollutants but limited support for others, e.g. CO2 emissions

Policies for Sustainable DevelopmentMacroeconomic theory oriented towards promoting

economic growth, how to design to also maintain well-being and promote human development??

“sustainable growth” – contradictory- “Green” taxes: making it more expensive to undertake

activities that deplete natural resources or contribute to degradation (internalizing externality in economic theory)

- Elimination of agricultural and energy subsidies that encourage over-use of energy

- Promotion of greater recycling of materials and use of renewable energy

- Tradable permit systems: offering limited number of permits to emit specific quantities and types of pollution

Policies for Sustainable Development- Promotion of efficient transportation systems

replacing energy-intensive automotive transport- debt-for-nature swaps for debt of developing

countriesKyoto Protocol (1997) – commitment to reduce

greenhouse gas emissions an average of 5 percent below their 1990 emissions.

US refused to ratify, also those ratified unable to meet the targets.

Will expire in 2012, failed to agree on the allocation of responsibility across countries