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USC ECON 205 - International Trade and Finance

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ECON 205 2nd Edition Lecture 15 Outline of Last Lecture I. Open vs. Closed EconomicsII. The Balance of Trade and Accounting III. Determination of Exchange RatesIV. The IMF and the World Bank V. Marginal Propensity to ImportOutline of Current LectureI. Student Lecture: Healthcare Spending, Publications, and GIC-G by Jessica GreenhalghII. Paper PublishingIII. Introduction to International TradeIV. Domestic Accounting and Currency ExchangeV. The European Monetary UnionCurrent LectureI. Student Lecture: Healthcare Spending, Publications, and GIC-G by Jessica GreenhalghWithout 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 PublishingGetting 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 jobsand 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 TradeInternational 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 IIera 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 growthrate. 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 ExchangeRegarding 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 UnionThe 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 tocreate 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


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