EC 102.01

1. EC 102.01 Final Exam – Aug 8, Monday 17:30 – 20:00 NH 105 : ACAR – ISIK NH 405 : INAM – YILDIZ Exam will be comprehensive, including all material before Midterm 2 + new topics: Ch 12 – ALL Ch 14 – Section 2, Section 3, Section 4 Ch 13 – Section 1 (1.1, 1.2), Section 3, Section 4 Ch 15 – Section 2, Section 3 Any Additional Material uploaded on course website

2. Outline Macroeconomic Issues and Applications Ch 13 – The Global Economy Section 4 – International Finance Ch 15 – Macroeconomic Challenges for 21st C Section 2. Macroeconomics and Human Development Section 3. Macroeconomics and Ecological Sustainability

3. International Finance Discussed so far trade in goods&services; need to consider flows of income, assets, foreign currency Exchange rate – the number of units of one currency that can be exchanged for a unit of another currency; e.g. 1 USD = 1.69 TL; 1 USD = 1.42 EUR PPP – under certain idealized conditions (free trade of currencies, no transportation costs, immediate response of the markets etc.), ER reflect differences in purchasing power of across countries PPP adjustment – taking into account cost of living variations

4. PPP - identical good should cost same in all nations (assuming no transportation costs and trade barriers) Big Mac Index – primitive BUT used to determine extent to which market exchange rate differs from equilibrium exchange rate, useful predictor for exchange rate movements. International Finance

5. Foreign Exchange Markets Supply – determined by domestic residents; exports of HC; foreign investment in HC; transfer payments to HC. Demand – determined by foreign residents; imports of HC; foreign investment by HC; foreign transfer payments ER – price of foreign currency, can use supply-demand framework

6. Foreign Exchange Markets Speculation - attempt to profit by trading on expectations about prices in the future Depreciation – weakening of the currency Appreciation – strengthening of the currency Also need to take into account the levels of inflation across countries =>RER

7. Balance of Payments • Flows of payments into and out of a country – inflows and outflows arising from trade, earnings, transfers, asset transactions • Inflows: receipt of payments from foreign source • merchandise exports • transportation & travel receipts • gifts from foreign residents • investment in HC by foreign residents • Outflows: payments to foreign source • merchandise imports • transportation & travel expenditures • gifts to foreign residents • foreign investment by residents of the HC • aid given by home country government

8. Balance of Payments BOP = CA + KA = 0 Current Account (CA) Monetary value of transactions in goods, services, income flows and unilateral transfers Financial (Capital) Account (KA) International purchases & sales of real estate, stocks & bonds, government securities and commercial bank deposits Statistical Discrepancy Impossible to fully collect accurate and precise information; need to make correcting entry with a residual

9. Turkey: Balance of Payments - 2008

10. Macroeconomic Policy in an Open Economy Remember our macroeconomic model with closed economy (NX = 0); MP operates over i and I for Y Open economy: Now any change in MP is more effective because of ER interactions

11. Exchange Rate Regimes Up to now, we assumed that ER is determined by market forces (S&D) => flexible/floating ER regime uncertainties, need for a more stable and predictable environment for trade (depreciation/appreciation) Fixed ER Regime => currencies are traded at fixed ratios; “pegged”; no independent MP because CB intervenes on money markets to keep ER fixed Devaluation / revaluation by FX market intervention and K controls

12. Macroeconomics and Human Development Previously discussed on “development” beyond a focus on GDP, productivity and industrialization “people centred development”, “development with a human face”, “socially sustainable development” Human Development - proposed by UNDP Amartya Sen – capabilities approach Evaluating institutions, policies and actions according to the opportunities (or freedoms) they give people for valuable ways of living

13. Macroeconomics and Human Development Main question: “what do we really want from development?” Shifting the focus of attention from measures of income and wealth towards opportunities for health and participation in the society. “creating an environment in which people can develop their full potential and lead productive, creative lives in accordance with their needs and interests” Basic needs + other dimensions of a worthwhile life

14. Macroeconomics and Human Development Human development vs. Economic Development As discussed before, combination of measures of life expectancy, literacy and GDP per capita. At least some key goods and services are needed for human development to occur – e.g. health-related interventions in Africa. At high levels of income, other dimensions are important (freedom from violence, investments in productive and creative capacities of next generation, care services enhancing participation of both receivers and caregivers...)

15. Macroeconomics and Human Development Millenium Development Goals – declared by Un in 2000; focusing on improvement in the lives of the very poorest people in the world 8 main goals, with 2015 deadline for achievement • Eradicate extreme poverty and hunger (halve population below 1$-a-day income) • Achieve universal primary education • Promote gender equality and empower women • Reduce child mortality (under-5 mortality rate by 2/3) • Improve maternal health (maternal mortality ratio by 3/4) • Combat HIV, malaria and other diseases • Ensure environmental sustainability • Partnership for development

18. Major Environmental Issues Economic growth accompanied with both increasing demand for natural resources + waste and pollution • Global population: drastic increase in population, pressures to environmental issues – esp. Food production (land degradation, pollution from fertilizers etc.) • Resource depletion: fisheries, tropical forests, stocks of mineral resources • Pollution and wastes: rich countries creating two-thirds of global waste • Climate change: “lagged”, most drastic impacts will occur in the next few decades + effects disproportionately falling on the developing countries

19. Economic Growth and Environment Economic development may reduce environmental damages per capita – move towards service based economy etc. Environmental quality – “normal good”: people will demand more when get richer Environmental Kuznets Curve (EKC) – inverted U-shaped relationship between economic development and environmental damages Seem to hold for some pollutants but limited support for others, e.g. CO2 emissions

20. Policies for Sustainable Development Macroeconomic theory oriented towards promoting economic growth, how to design to also maintain well-being and promote human development?? “sustainable growth” – contradictory • “Green” taxes: making it more expensive to undertake activities that deplete natural resources or contribute to degradation (internalizing externality in economic theory) • Elimination of agricultural and energy subsidies that encourage over-use of energy • Promotion of greater recycling of materials and use of renewable energy • Tradable permit systems: offering limited number of permits to emit specific quantities and types of pollution

21. Policies for Sustainable Development • Promotion of efficient transportation systems replacing energy-intensive automotive transport • debt-for-nature swaps for debt of developing countries Kyoto Protocol (1997) – commitment to reduce greenhouse gas emissions an average of 5 percent below their 1990 emissions. US refused to ratify, also those ratified unable to meet the targets. Will expire in 2012, failed to agree on the allocation of responsibility across countries