7. Global Macroeconomics

A thorough treatment of the subject may be found in Farrokh Langdana, Macroeconomic Policy: Demystifying Monetary and Fiscal Policy. New York: Springer Press, 2nd Edition, 2009, Chaps.​ 2, 3, and 4, from which much of the material in this section is based.

The less-used gross national product (GNP) statistic measures the output produced by a country’s factors of production regardless of where the production takes place. This would include income earned by citizens working abroad and would exclude the income of foreign-owned factories operating within the domestic borders. Wages of domestic citizens working in the foreign-owned domestic factory would be included.

Transfers received include things like Social Security payments, unemployment insurance, various assistance programs, etc.

If (G – T) is positive, this represents a fiscal budget deficit, as government spending exceeds revenues. A negative (G – T) figure represents a fiscal budget surplus, as taxes exceed government spending. Likewise, a positive figure for (Imp – Exp) indicates a current account deficit, as imports exceed exports. Conversely, a negative figure for (Imp – Exp) means that exports exceed imports, which is a current account surplus.

Examples of national budgets in both categories abound; the United States began running large budget deficits in the 1980s, was briefly in surplus in 2000, and returned to ever-expanding deficits in the years following. Many Asian economies in the mid- to late 1990s were in surplus and remain so today. Much of Europe, as of this writing, is plagued by very large deficits. This subject will be explored in more detail in later chapters.

See the “Foreign Trade” section of the US Census Bureau’s website: http://​www.​census.​gov/​foreign-trade/​index.​html. Details on methodology may be found in the “Guide to Foreign Trade” section at http://​www.​census.​gov/​foreign-trade/​guide/​sec2.​html. Accessed Sep 24, 2012.

Calculation of the merchandise trade balance bases US exports on FAS (free alongside ship) value, which is the value of exports at the US port of export, based on the transaction price, including inland freight, insurance, and other charges incurred in placing the merchandise alongside the carrier at the US port of exportation, but excluding the cost of loading the merchandise aboard the exporting carrier, freight, insurance, and international transportation charges. US imports are based on customs value, which includes only the price actually paid (or payable) for merchandise when sold for exportation to the United States and excludes US import duties, freight, insurance, and other charges incurred in bringing the merchandise to the United States. Source: US Census Bureau (see note above).

We return to this topic in Chap.​ 12 and include an eye-opening chart chronicling default events over recent decades.

Or nearly so, the USA has managed (so far) to maintain safe-haven status despite some recourse to monetization in the wake of the financial crisis of 2008 and the ensuing prolonged global slowdown. The USA has in the past periodically resorted to this practice.

Given the probabilistic nature of our quantum universe, there is in fact no true “risk-free” asset anywhere to be found. Even the sovereign debt of the United States, long recognized as the safest in the world, incorporates a discount generally ranging from 30 to 50 basis points based on CDS premiums, and was actually downgraded by various ratings agencies in 2011–2012. We will use the terms “risk-free” and “safe haven” to refer to any economy which is understood to conform to our criteria listed above. These traditionally include the USA, the UK, France, Germany, and Japan and may, depending on one's perspective, include the Euro area as a whole, even with the risky periphery nations included, given its substantial French and German foundation.

Likewise, when the current account is in surplus, with exports exceeding imports, a pool of funds accumulates domestically which is then invested overseas, leading to a capital account deficit. We will explore the KAB further in later chapters; for now, the key point is its inverse relationship with the CAB.

The “borrowing” represented by (I) may take many forms, including debt (bonds, debentures, bank loans, etc.) or equity. From an accounting perspective, these are all company liabilities that are created when new funds are invested in the company.

We explore the effects of restrictions on the movement of capital in Chap.​ 12.

As we will discuss later, interest rates are not the only factor driving international capital flows. Long-term macroeconomic outlook is highly important, and relative currency exchange rates, as well as inflation, play important roles as well.

The relationship between the figures is imprecise as the 2010 fiscal deficit is based on a fiscal year ending September 30, rather than the calendar year on which the current account balances are calculated. Nevertheless, the general relationship holds. Data sources: US Treasury (net foreign holdings), US Congressional Budget Office (fiscal budget), and US Census Bureau (current account).

Alternatively, the capital-exporting countries may be considered “importers” of title to foreign assets. Thus, their current account surplus will be accompanied by a capital account deficit. While the current account basically tracks the movement of goods and services, the capital account tracks the movement of the title to real and financial assets. This will be discussed in more detail in later chapters.

Artificial limitations on capital flows remain imposed by governments for various purposes. These capital controls are discussed at length in Chaps.​ 11 and 12.

In classical macroeconomic analysis, private capital investment is expressed as I = I – fi, where I is investor confidence, i is the interest rate, and f is the elasticity of capital investment to the interest rate. See Langdana, Macroeconomic Policy: Demystifying Monetary and Fiscal Policy, Chaps.​ 2, 3, and 4.