ECON 205 2nd Edition Lecture 15 Outline of Last Lecture I Open vs Closed Economics II The Balance of Trade and Accounting III Determination of Exchange Rates IV The IMF and the World Bank V Marginal Propensity to Import Outline of Current Lecture I Student Lecture Healthcare Spending Publications and GIC G by Jessica Greenhalgh II Paper Publishing III Introduction to International Trade IV Domestic Accounting and Currency Exchange V The European Monetary Union Current Lecture I Student Lecture Healthcare Spending Publications and GIC G by Jessica Greenhalgh Without changing the current US Healthcare spending our whole GDP will be consumed by it by 2027 The government needs to remove medical cartels and regulate the insurance and pharmaceutical industries Healthcare spending is grossly excessive topping almost three trillion in 2012 Additionally Obamacare and Romney miss the point the CPI average versus medical components shows total healthcare bill is increasing and will exceed eventually the GDP The major reasons for this are high physician and health administrator salaries and pharmaceutical costs 48 6 million people still are without any health insurance The CPI average versus CPI medical components show that by approximately 1990 there is a huge divergence especially for prescription drugs and medical care services Because Medicare has low administrative costs 3 it is the most efficient system II Paper Publishing Getting a paper published Bases of the article must be reasonable and justified All given factual statements must have sources Sources must be credible as publishers like Huffington Post will verify all sources You may have to resubmit a few times until every factual statement is cited Why it s important for students It provides experience with performing economic research It creates a stronger resume for jobs and graduate school It allows the professor to know that the student can perform research outside of class and employers favor experience with real world research III Introduction to International Trade International trade and finance contribute to efficient employment of the productive forces of the world Trade and finance are the prime engines of economic growth and income convergence of nations National economies are linked with international economies in trade and finance This point is clearly illustrated during the interwar period and the post World War II era of widening trade linkages financial markets and rapid economic growth Some countries however engage in import substitution replacing imports with domestic product The idea of that is that by doing that it will contribute to the economic growth of the nation Foreign trade and economic activity takes place in an open economy that engages in international exchange of goods services and investment A closed economy has no exports imports or foreign investments Without international trade growth slows to almost nothing as what happened to Burma Exporting helps grow the economy rapidly as shown by China s fabulous growth rate Through international trade nations specialize in exporting goods and services in which they have comparative advantage and are efficient and importing goods and services in which they are relatively inefficient Mutual benefit is the basis for international trade as all trading partners engage in voluntary exchanges and benefit Like convergence of per capita income international trade is not a zero sum game In conclusion international finance facilitates trade and investment Rule of 70 To determine when a country s economy will double divide 70 by the growth rate For the next exam a couple of questions will be on the rule of 70 IV Domestic Accounting and Currency Exchange Regarding United States international trade the balance of payments account is composed of two parts the current account merchandise or trade balance service investment account unilateral transfers and the financial account private gov t official reserve change and others The two add up always to zero Currency rate is determined by demand and supply in the short run However it is volatile due to monetary policy political events and expectation changes However it is more useful to use purchasing power parity exchange rate a nation s exchange rate will tend to equalize the cost of buying traded goods at home with the cost of buying these goods abroad V The European Monetary Union The European Monetary Union 1999 came about largely to remove the uncertainty of the value of currency of the member nations due to exchange rate fluctuations A common currency the Euro was created This movement was part of the effort since WWII to create political and economic stability among the member countries The European Central Bank ECB whose main goal is price stability of 2 per year exercises the European monetary policy and to minimize exchange rate volatility However by 2012 at least four Southern European countries have economic and volatility issues Portugal Italy Greece and Spain