Latin America Economic History Notes
Essay by Lim Aaron • November 30, 2016 • Course Note • 8,980 Words (36 Pages) • 1,296 Views
Latin America and history
Week 1
Services and goods
The higher the urbanization rate in a country, the higher percentage of services it provides in comparison with products/goods it provides.
Economically active population
People actively searching for work. Effectively it Is the labor factor looking for work. Higher the number generally, higher the quality/effectiveness of work in the country. Exception is Chile/Uruguay. -> Proabably because of level/quality of education.
Human development indicator
The Human Development Report Office releases five indices each year: the Human Development Index (HDI), the Inequality-Adjusted Human Development Index (IHDI), the Gender Development Index (GDI), the Gender Inequality Index (GII), and the Multidimensional Poverty Index (MPI).
Week 2
In Latin America : Macroeconomics of an open economy
Expenditure approach
Calculating demand in an economy
- Aggregated demand = Consumption (C) + Investments (I) + Government spending (G) + Trade balance (export (E) – import (M) )
X → export of goods and services
M → import of goods and services
- Y = C + I + G + [ (X-M) + NY + NCT]
Current account (CA) = ( X-M) +NY +NT
NY: Net income from aboard
NCT: Net current transfers
New Equation
- Y = C + I + G + CA
- CA = Y - [ C + I + G ]
CA is the gap between disposable income (Y) and expenditure
CA<0⬄ Y<[C+I+G]
What kind of economic policy should u adopt production is lesser then expenditure in the country?
Change the composition of AG
- Reduce expenditure (Govt spending)
- Increase production
- Kenyes : 2y/2t > [pic 1]
Y – [ C + G ] = I + CA
S = I + CA
CA is the gap between savings and investments; if there is a deficit u can either increase savings or investments
Solution to current account deficit
Increase savings via interest rate or income
Increase investments
S – I = CA => ( S,public + S,govt) – (I,p +I,g) =CA
CA = (Sp –Ip) + (Sg-Ig)
- CA < 0 public deficit
The current account also equals the country’s net lending to foreigners. Unlike a closed economy, an open economy can save by domestic and foreign investments. National saving therefore equals domestic investment plus the current account balance.
Balance of payments
the difference in total value between payments into and out of a country over a period.
- Composition of Current account
- Trade balance (goods)
- Services balance
- When consumer pays for services outside of the country
- Income balance
- When taxes paid goes out of the country to the home country
- Net transfers
- Capital account (not used in this course)
- Non market transactions
- Financial account (The Capital flows registered in this account)
- Foreign direct investment deal with international company
- Company takes the decision to make a business in a new environment
- Portfolio/financial flows
- Capital inflow or flight
- Derivatives
- Other investments
- International monetary funds
- Error of omission (not use in this course)
CA + FA + BP
CA <0
What happen if current account is a deficit?
Since Brazil’s CA is dominated in $US.
- Increase financial accounts
- Increase interest rates – attractiveness
- Liquidate international reserves
- Will cause bleeding out of reserve
- Lenders to help bleeding, IMF
Balance of payments accounts provide a detailed picture of the composition and financing of the current account. All transactions between a country and the rest of the world are recorded in the country’s balance of payments accounts. The accounts are based on the convention that any transaction resulting in a payment to foreigners is entered as a debit while any transaction resulting in a receipt from foreigners is entered as a credit.
Week 2: lesson 4
Latin American countries have been the recipients of a large portion of total international capital flows to developing countries, both in the late seventies to early eighties and in the early nineties. These inflows have financed persistent current account imbalances, as well as the accumulation of foreign exchange reserves
Learning goals
Debt crisis in the early 90’s
- International capital flows in XXth Century
- Apply concepts of CA of BP in the imbalances of the 70’s
International context
Time line | Incident | Remarks | Key events |
1870-1914 | The gold standard and stability | Usage of a currency backed by gold Encourage of open economies -Foreign trade International division of labor Who provides capital to LA to purchase these goods, considering selling coffee is hard to buy railroad stuff. Argentina was rich, richer then Switzerland etc |
Look at case study |
1919 – 1939 | Instability in international monetary system | Western Nations (developed country) USA -> Germany ->France/UK -> USA Latin America Finance thru Government to government | France and UK have to pay back the loans to USA France and UK requested Germany to pay back for the war In order to do so US make loans to Germany thru private capita l(JP morgan) This resulted in US being the international currency Brazil have strong trade flows to Germany to use marks |
1944 - 1973 | Bretton woods: In dollar we trust? | Agenda after WWI : We need to avoid another world war. So they need to create peace, prosperity and unity between nation. So multilateral agent (organization) were created to ensure their countries united. Contract was sign in Bretton woods between 46 nations. |
Design something that will avoid savings from being transferred to developed economies.
Read book “the globalization of Capital) |
1960s | London Bank systems | Bretton woods wanted to increase trade London Bank system Q regulations in US : Celling to interest rates to central bank Cold war | Need to increase liquidity in markets Deposits in USD with full convertibility to any European currency -Useful for Big companies like GM to pay their workers in EU countries Deposit flows from US to Europe Eastern European countries/ Socialist country didn’t want to deposit money in London bank system denominated in US$ -So they deposit them in international assets in Europe |
1974 - 1982 | Oil shock and the first south of south capital flows (apply concept of CA of BPin the imbalance of 70’s) : by Brender and Pisani | 2 oil shocks 1974 & 1979 -Iran war etc -Oil producers are not align with USA Correlations between Oil producers CA Where did this surplus go? | Compared to 1973 Sharp rise in price 3x by 1975 and 10x 1980 Then 1980-1981: Sharp drop in price When crude oil prices increase oil producing countries get more surplus in their current account Flow of capital
|
1974’s Case illustration | |||
Oil producing countries(middle east) | US & EU | LA / Asia Developing countries | Remarks ( outcome ) |
CA > 0 | CA > 0 | CA > 0 | Impossible |
CA appx 0 | CA apprx 0 | CA apprx 0 | Possible |
CA > 0 | CA < 0 (still not enough to keep surplus) | CA < 0 (so remainder to LA/Asia etc) | CA < 0 : Deficit CA > 0 : Surplus |
//but this means no one is buying the oil //IMPOSSIBLE: NO OIL NO PRODUCTION | |||
// The trade balance surplus of one nation will be the deficit of another nation // therefore the current a/c surplus will be deficit of another nation |
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