POL S 7 Lecture 11: Lecture 11
Document Summary
In the absence of global government, how are international currencies supplied and international monetary relations regulated? (chapter 9) Every year, approximately trillion is invested abroad. And why do relations between foreign investors and the countries in which they invest often become hostile and politically controversial? (chapter 8) To exchange goods with others in a foreign country, need to convert one currency into the other. Foreigners want to be paid in their currency. To buy assets in another country, foreigners need to convert their currency into the home currency. When x-m<0, a country should depreciate its exchange rate, lowering the price of its goods. Effects of depreciation spread across all tradable sectors. If all countries did so, none would reap an advantage, and each would only lower its purchasing power against countries that did not depreciate. Beggar-thy-neighbor policies in the 1930s worsened the great depression. Given incentives to defect, need exchange rate regime (institution) to facilitate cooperation and exchange.
