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The Concepts and Theories of International Economics Explained by Miltiades Chacholiades: Focus on Chapter 25



International Economics by Miltiades Chacholiades




International economics is a fascinating and complex field of study that deals with the interactions between countries in terms of trade, finance, and development. It examines how different economies affect each other through the flows of goods, services, money, and people across borders. It also explores how policies and institutions shape these flows and their impacts on welfare, growth, and stability.




International Economics Miltiades Chacholiades 25.pdfl



One of the most influential books on international economics is International Economics by Miltiades Chacholiades, a Greek economist who taught at several universities in the US and Europe. His book, first published in 1978, provides a comprehensive and rigorous analysis of the theories and empirical evidence on various topics in international economics, such as trade theory, trade policy, balance of payments, exchange rates, international monetary systems, and economic integration.


In this article, we will focus on one of the chapters of his book, chapter 25, which deals with the balance of payments and foreign exchange markets. We will explain what these concepts mean, why they are important, and how they are related to each other. We will also discuss some of the models and hypotheses that Chacholiades uses to explain the behavior and determinants of these variables.


Chapter 25: The Balance of Payments and Foreign Exchange Markets




What is the balance of payments?




The balance of payments is a record of all the transactions between a country and the rest of the world during a given period of time, usually a year or a quarter. It shows how much a country earns from its exports and spends on its imports, how much it borrows from or lends to other countries, and how much it changes its holdings of foreign assets and liabilities.


The balance of payments is divided into three main accounts: the current account, the capital account, and the official reserves account. Each account measures a different type of transaction and has a different impact on the country's economic performance and position.


What are the components of the balance of payments?




Current account




The current account records the transactions that involve goods, services, income, and transfers. It includes:



  • The trade balance, which is the difference between exports and imports of goods.



  • The services balance, which is the difference between exports and imports of services, such as transportation, tourism, insurance, and royalties.



  • The income balance, which is the difference between income received from abroad and income paid to abroad, such as interest, dividends, and wages.



  • The transfers balance, which is the difference between transfers received from abroad and transfers paid to abroad, such as remittances, foreign aid, and pensions.



The current account balance is the sum of these four balances. It measures the net flow of goods, services, income, and transfers between a country and the rest of the world. A positive current account balance means that the country has a surplus, meaning that it earns more than it spends. A negative current account balance means that the country has a deficit, meaning that it spends more than it earns.


Capital account




The capital account records the transactions that involve financial assets and liabilities. It includes:



  • The direct investment balance, which is the difference between direct investment inflows and outflows. Direct investment refers to the acquisition or disposal of a lasting interest in a foreign enterprise, such as ownership or control.



  • The portfolio investment balance, which is the difference between portfolio investment inflows and outflows. Portfolio investment refers to the purchase or sale of foreign securities, such as stocks and bonds.



  • The other investment balance, which is the difference between other investment inflows and outflows. Other investment refers to the lending or borrowing of foreign currency, such as loans, deposits, and trade credits.



The capital account balance is the sum of these three balances. It measures the net flow of financial assets and liabilities between a country and the rest of the world. A positive capital account balance means that the country has a surplus, meaning that it receives more capital than it sends. A negative capital account balance means that the country has a deficit, meaning that it sends more capital than it receives.


Official reserves account




The official reserves account records the transactions that involve official reserves. Official reserves are the foreign assets that are held by the central bank or the government to intervene in the foreign exchange market or to meet international obligations. They include:



  • Foreign currency reserves, such as US dollars, euros, or yen.



  • Gold reserves, which are valued at a fixed price in US dollars.