Sunday, March 21, 2004

International Economics

"In the textbook model of the internatinoal economey, exchange rates are largely determined by imports and exports of goods and services. Poor countries will import more than they export, and will borrow from abroad to finance this gap. When the current account deficit gets too large, the currency starts to depreciate, increasing exports and reducing imports until a balance is restored.

But under financial liberalisation, through the globalisation process, has meant that exchange rates are no longer determined by the physical movement of goods and services, but by flows of capital...But the implications fo this new paradigm are that imbalances on the trade balance are often reversed through financial crises rather than gradual adjustment."

1. The new economics foundation, April 2002, The United States as a HIPC (Heavily Indebted Poor Country).