|Activity: Josko Joras (A), December 2012
Textbook Reading: Chapter 10 (Intro and Section 10.2; pp. 327-329 and pp. 342-357)
For an open economy
GDP = C + I + G + (X – M).
However it’s important to realise that imports don’t subtract from GDP.
Read more about the Big Mac index at The Economist. For more on how Argentina games it, see:
- “Argentina likely manipulating Big Mac prices to keep inflation seemingly lower“, Public Radio International, February 7th 2012
There are several nice utilisations of the Big Mac Index. For example, in a study that looked at the best cities in the world to study in, they used the Big Mac Index as a measure of living costs. (And if you’re curious, the best city in the world to study in is…. London!)
Here’s an intro to Balance of Payments:
In his 2023 book, ‘The crisis of democratic capitalism’, Martin Wolf makes the following points (p. 70-71):
- From 1870-1913 the UK ran a current account surplus of 4.6% on average.
- During this period, most of the net flow of financing went into buying real assets, such as infrastructure and mines in countries such as Argentina, Australia, Canada and the US.
- Between 1997-2007 China’s current account surplus averaged 4%, and Germany’s 3%. China’s surplus was as high as 10% in 2007, and Germany’s was over 8% in 2015, 2016 and 2017.
- This time, the net flow went into debt-fueled consumption, or assets like housing. This has contributed to a more fragile global financial system.
|Learning Objectives: Perform foreign exchange calculations. Understand Balance of Payments|