The basics
Chapter 1
Economics of Global Business, 1st Edition, MIT Press Copyright © Rodrigo Zeidan 2018
Why are we here? Economic
growth (GDP)
Inflation (CPI)
Monetary policy
Public Unemployment
Fiscal policy
Authorities (rate)
Currency policy
Income
Inequality (Gini)
Sustainable
Development
Goals
Role of Governments
Governments
provide public goods and
correct market failures;
pursue macroeconomic
stability;
determine how much and
through which means income
should be redistributed.
Structure of the book
Long and From closed GDP;
Markets: Currency inflation;
short run Monetary to open
goods and policy; unemploym
dynamics; and fiscal economy; Integratio
services; trilemma;
Growth policies, balance of ent; between
money; interaction inequality
gaps, interactions payments markets
loanable between
sustained and and and
funds; labor; economic sustainabilit
growth, restrictions exchange-
currency policies.
stagflation. rate regimes y
Assumptions and Equilibria
Economic models work on assumptions and are supposed to be ideologically
neutral.
They should describe the real world and allow for reliable conditional forecasts.
Building models based on simplified assumptions is at the core of science.
This book favors comparative statics over full-blown dynamic models (more
on this on chapter 2).
Shocks and Perturbations
Examples of shocks: financial crises, the effect of a trade war initiated by
country A on country B, the unexpected discovery of huge oil reserves, a
sudden spike in interest rates worldwide, an inflow of foreign investors etc.
Shocks are important features of the global economy. Steps for establishing
the economic impact of a shock:
Describing the state of the economy;
Determine which variables (either demand or supply) are affected;
Detail the new equilibrium and how the shocks then propagate to different
markets
Analyzing the policy responses that try to bring the markets to a path that is
desired by the policymakers.
Tradeoffs and the Free-Lunch Conundrum
Free lunch refers to an action that brings only benefits, but no costs.
There are always tradeoffs.
Example: Troubled Asset Relief Program (TARP). Bailout of US banks totaling
$700 billion. Many were harshly critical. TARP, like most economic programs,
comes with costs and benefits to society. Just as there is no free lunch, there
are no perfect policies that generate nothing but prosperity. Chapter 5
discusses the tradeoffs between bailing out banks and letting them fail, but
they are never crystal clear.
Context-dependency
Rare are the instances in which policy prescriptions are universal.
Even for the same country, the best course of action may change over time.
Examples of context-dependency: for country A austerity is warranted, while
for country B fiscal expansion might be better; Thailand let its currency
devalue when faced with a currency crisis –Malaysia chose to disallow capital
outflows.
Economic advice is context-dependent but is built on a solid understanding of
international economic processes.