International Finance Theory and Policy Analysis, Research Paper Example

Introduction; (Chapter 40-1)

The sources that bring about misunderstanding are easy to point out as the basic principals in comparative advantage are counter-intuitive clarity. The result based on formal model is so very contrary with the simple logic; second the theory is easily mystified with advantageous trade notions, which is basically known as the absolute advantage theory in the trade theory. Intuitive is the logic behind absolute advantage.

Some Preliminaries; (Chapter 40-2)

The confusion in the above concept makes pursuant and participant to this model think they have clear understanding on the comparative advantage, what they don’t know is that they are actually analyzing and understanding absolute advantage. The comparative advantage theory is best presented in mathematical form by the use of diagrammatic or example representation useful in the basic results and broader implication demonstration of the theory.

What Is Money? (Chapter 40-Pp3)

This study will depicts how equilibrium interest rate in an economy is affected by the demand and supply for money. Money market model is the name of this model that will be covered by the study. In every country money supply is generally categorized in two sections the total value of all checking accounts and currency and coin that is in circulation, these two sections of assets form the liquid part in the economy of any state, the central bank of the state regulates the funds and allocates them into the economy of the country, they control this process using several levers mechanism responsible for the purchase or sale of government treasury bonds this process is termed as “open market operation.”

Money Supply Measures; (Chapter 40-Pp4)

Money demand; this is referred to as the demand by business, government and the households, for soaring liquid resources which includes checking accounts deposits and currency. The holding money opportunity cost and the future desire to purchase things affects money demands. In order to hold money one has to give up the opportunity cost interest in other assets.

Controlling the Money Supply; (Chapter 40-Pp 5)

The interest rates rises when business and household likely allocate asset holding into interest bearing accounts (money) and hold less in money from. The primary source of funding which are the interest bearing deposits is used to lend in the financial sector, the supply of loan able funds is affected by total money demand changes and the interest rates on loans are affected.

Money Demand; (Chapter 40- Pp 6)

One average interest rate is the significant factor that equalizes money supply and money demand. With this rate in mind the equalizing factor on the supply of loan able funds which financial institution wishes to lend tallies the amount of funds that borrowers wish to sponge. The rate that equalizes money demand and money supply in the economy is the equilibrium interest rates.

Money Functions and Equilibrium; (Chapter 40-Pp 7)

The study continues and describes money demands, functions and equilibrium and the effect of money supply, price level and GPD increase and how they alternate and vice versa. This greatly reflects on the increase of the GPD which represents economic growth. This growth in the GPD will shape and affect the interest rates.

Money Market Equilibrium Stories; (Chapter 40-Pp 8)

Assimilation of the foreign exchange and the money market, this section integration of the foreign exchange and money market is observed and this demonstrates the existing interactions between the two markets.

Effects of a Money Supply, Price Level and GDP Increase; (Chapter 40-Pp 9 &10)

While holding other exogenous variables constant comparative statics helps with the examination exercise of how endogenous variables will take effect on one of the exogenous variables which will be change presumed. Ceteris assumption is the state of holding variables constant within their original value.

Integrating the Money Market and the Foreign Exchange Market, and Long-Run Prices Summary; (Chapter 40-Pp 11)

Given that price level are exogenously and assuming that they are affected by the other variables changes. In this section Suranovic argues that the rate of inflation in the economy is influenced by the money supply increase fostered by positive effect on price level. This effect occurs or take effect on the long run, the level of unemployment also affect the price level magnitude denting the economy of a country. This factor also collides with the degree in which money increase afflicts prices and the degree it has in the output affliction.

Money and FOREX Markets Combined; (Chapter 40-Pp 12)

In this model Suranovic integrates the foreign and money market in order to demonstrate the inter-relation and interface existing between the two major markets. This link that connects the two market segments arises since the rates in domestic interest are endogenous variable inclusive in the money market; hence FOREX market is associated with exogenous variables.

Comparative Statics Money Supply; (Chapter 40-Pp13)

This is an exercise that depicts how endogenous variables when one of the exogenous variables change is presumed will be affected. This happens when all other exogenous variables are held constant. This holding of other variables within their original value is what is known as the ceteris paribus assumption.

Long-Run Prices; (Chapter 40-Pp 14)

In this model Sarunovic argues that positive effect on the price level is experienced when money supply increases and thus the economy inflation rate. This effect takes rapid insertion instead of moderate graduation effect, thus it occurs in the “long run.” Level of unemployment in the economy also greatly influences the magnitude of price level effect. The degree that unemployment affects the prices level and output coincide.

Aggregate Demand for Goods and Services; (Chapter 50-Pp 2)

In this chapter Suranovic describes how the demand and supply of national output for services and goods combine and determine the equilibrium level in the national output of the economy. This model is known as the services and goods market model and sometimes also harbors the initial S &G market model. GNP in this model is used as measures for national output instead of GDP. As one wishes to define trade balance (EX-IM) as the current account the above adjustment has to be made. This adjustment falls mostly in the sector of export and import demand.

Consumption Demand; (Chapter 50-Pp 3)

Suranovic in the consumption demand section acclaims that the demand by the economy household and individuals of services and goods represents consumption demand. For most countries this is categorized as the major national income accounts and mostly comprising in the GPD from 50% to 70%. Disposable income is the main determinant of consumption model of demand for services and goods. The entire income household have at their disposal in expenses is what is referred to as disposal income. Disposal income is defined by the government as national income (GNP) after taxation, inclusive of the government transfer payment issued out to people.

Investment Demand; (Chapter 50-Pp 4)

In the model of investment demand Suranovic refers this model to the physical mechanism used by the business in capital services and goods in expansion or maintenance. Facts to ponder here is that the financial investment is not here referred to as the investment demand, and is assumed exogenous meaning that its value is not attached to any variable within this model but it is determined outside the model. The assumption is made generally to allow focus to be on later changes to exchange rates and simplification of the analysis.

Government Demand; (Chapter 50-Pp 5)

Government demand model refers to government demand for economy production of services and goods, and in less cases the demand overlaps even to the private section. In this model it’s aligned with investment demand; and exogenous assumption applies.

Export and Import Demand; (Chapter 50-Pp 6)

Export demand model refers to as domestically produced goods and services demand by foreign countries (foreign residents). Import demand model refers to as demand of foreign G&S by domestic residents, this import G&s does not form part of the GNP. This is because they are subtracted from national income identity and included in the government expenses, export, consumption and investment; the demand from national income identity includes demand for imported goods.

The Keynesian Cross Diagram; (Chapter-50-Pp 7)

Suranovic in this diagram depicts in the G&S market model equilibrium level of national income.

The Aggregate Demand Function; (Chapter 50-Pp 8)

In the aggregated demand functions model as observed by Suranovic, he indicates that when disposal income rise then consumption demand will also rise but current account demand will fall and this is negatively related to disposable income. This change of aggregated demand has an ambiguous effect on the disposable income.

Goods & Services Market Equilibrium Stories; (Chapter 50-Pp 9)

Suranovic in the G&S market equilibrium section acclaims that economics equilibrium associated behavioral story defines the force which moves endogenous variables in the equilibrium value. Where else he state that variables that don’t change due to adjustment of equilibrium becomes exogenous variables. This adjustment in exogenous variables necessitates the cause on new equilibrium adjustment. While telling equilibrium story the typical assumption should be that endogenous variables are not equilibrium, and this helps in the explanation of why and how equilibrium value will be adjusted by this variables

Comparative Statics in the G&S Model; (Chapter 50-Pp 10)

Comparative static models as acclaimed by Suranovic refers to as any particular application by which any exogenous variables is changed and the change effect on equilibrium value and this is shown in the value of endogenous variables. He further expounds that controlled economic experiment is also another term for comparative statics exercise.

Effect of an Increase in Government Demand on Real GNP; (Chapter 50-Pp 11)

Suranovic on the effect of an increase in government demand on the real GNP acclaims that this usually this happens when the government has passed a new budget through legislature as to initiatives on new spending. When this is assumptions then it known as the ceteris paribus assumption and it means that all other particulars of exogenous variables remain fixed assumingly. The key point in this model remains that any increase in the government demand is not remunerated by the increase of taxes and transfer payment decrease.

Effect of an Increase in the US Dollar Value; (Chapter 50-Pp 12)

Suranovic on the effect on an increase in the U.S Dollar value on real GNP states that the increased value in spot dollar increases the real dollar and this rapture causes U.S goods and services to become relatively expensive and cheapens foreign goods and services. These changes affect the demand for U.S exports and results to aggregate demand reduction brought about by increased import demand.

The J-Curve Effect; Chapter 50-Pp 13

The J-curved effect; according to Suranovic accord the theory of the J-curve is basically an explanation of J-like pattern change in the trade of a country balance which addresses the meaning of abrupt and ample devaluation of the currency of the country. He further acclaims that goods market model assumes that exchange rate can be directly linked with the demand for current account in the U.S. the relationship logic explanation given to this is that when the exchange rate rises and the U.S dollar depreciates foreign good will be more expensive to the resident of these states, this will affect the demand for import resulting to decrease in demand. However this will lower the prices of the goods from this country and will increase demand for the U.S exports, this increase and decrease in the demand of import highly contribute to increased demand on current account. However in real world economies according to analysis of data suggestion depreciating currency has the tendencies of temporary increase deficit instead of the decrease predicted. This temporary reverse explanation is what is referred to as the J-curve theory.

Conclusion

Suranovic describes how one should be able to analyze and evaluate specific policies like international dumping, environmentalism as protection, the desirability of free flows of capital and exchange choice rates. Equipping one with the unifying framework for better understanding of the link between variety of approaches and models, his elaboration on the help differentiate the model of Ricardian, Heckscher-Ohlin and other trade theory models and the between the asset approach and monetary approach in the theory of exchange rate.

Suranovic major emphasis is to guide the pursuant acquire and be equipped with a proper manual that will guide in analytical methodology and have greater understanding of when and how different methodology should be applied and how they affect the economy of the country if participated in the GPD.

Work Cited

Suranovic, Steven. International Finance Theory and Policy. February 19, 2007. <<http://internationalecon.com/Finance/financehome.php>>