1. Introduction to Economics International Finance Distribution of Income

2. Recession began in April, 2001 Employment in Millions, Seasonally adjusted Source:http://www.dismal.com/ The Dismal Scientist’s Site

3. What is the Greatest Threat to International Stabilty? Political: Terrorism Economic: International Monetary Crisis –cause: speculative bubble in high growth rate economies –trigger: currency speculators trying to destabilize the currency –problem: capital flight – target country defense: sufficient foreign currency reserves –international defense: International Monetary Fund loans

4. An Example of an International Financial Crises East Asian Crisis

5. Thailand in 1997 Production down –Toyota shuts down 2 large factories in Bangkok Banks hold bad loans –speculation in golf courses, condos, high rises West worries: potential Intl. financial crisis International Monetary Fund: bailout loans –Indonesia: $10 B US Treasury pledges $3B –Thailand: $22 B –Philippines: $1B –South Korea: $40B source: Business Week 11-17-97

6. Problems Potential instability is associated with bad investments in growing countries trigger could be speculation against a currency if authorities hold insufficient currency reserves Only international mechanism for stabilization is cooperation among countries and central banks

7. Changing Scenario in Asia Source: Economic Report of the President, 1997 Four Tigers: Hong Kong, Taiwan, Singapore, South Korea Thailand and Neighbors: China, Malaysia, Indonesia

8. source: CIA

9. source: Federal Reserve Bank of St. Louis

10. Capital Flight 1. foreigners sell their Thai investments 2. foreigners exchange their Baht proceeds for say dollars 3. Demand for dollars shifts and price of the dollar in Bahts rises Bahts per US $ quantity of dollars demand for dollars supply of dollars

11. source: Federal Reserve Bank of St. Louis

12. Capital Flight 4. Thai authorities could use their Dollar Reserves to buy Bahts, stabilize the x-ch rate, but they may have used those $ to buy capital goods to support growth Bahts per US $ quantity of dollars demand for dollars supply of dollars

13. Source: Yardeni

14. Source: http://interactive.wsj.com

15. Source: Yardeni ‘94 Exports: Manufactures: 73% Partners: US 21% Japan 17%

16. Capital Flight: Can tell the story in either currency 1. foreigners sell their Thai investments 2. foreigners exchange their Baht proceeds for dollars 3. Supply of Bahts shifts and the dollar price of the Baht falls dollar price of Baht quantity of Bahts demand for Bahts supply of Bahts

17. Currency Speculators can Trigger a Crisis For example, currency speculators could sell Bahts, trying to drive the price down, guessing that the Thai authorities did not have sufficient foreign currency reserves to buy Bahts, and defend their currency In 1997, the speculators tried to destabilize Hong Kong, but the authorities had large reserves of foreign exchange and the speculators failed

18. Currency Speculators: A destabilizing influence 1. Currency speculators sell their Bahts driving the Baht down 2. If the Thai authorities do not have sufficient dollar reserves to buy Bahts, they can not defend the currency dollar price of Baht quantity of Bahts demand for Bahts supply of Bahts

19. Thailand Economy Source: World Factbook overview: After enjoying the world's highest growth rate from 1985 to 1995 - averaging almost 9% annually - increased speculative pressure on Thailand's currency in 1997 led to a crisis that uncovered financial sector weaknesses and forced the government to float the baht. Long pegged at 25 to the dollar, the baht reached its lowest point of 56 to the dollar in January 1998 and the economy contracted by 10.2% that same year. Thailand entered a recovery stage in 1999, expanding 4.2% and grew about the same amount in 2000, largely due to strong exports - which increased about 20% in 2000. An ailing financial sector and the slow pace of corporate debt restructuring, combined with a softening of global demand, is likely to slow growth in 2001.

20. Could the US, as a Debtor Nation, Have a Problem? To finance our excess imports of goods and services, we sell securities to foreigners As a consequence, we are leveraged by this debt

21. Link Between Government Deficits and Trade Deficits

22. US Govt. runs a deficit –citizens don’t want higher taxes US Treasury finances deficit by selling treasuries –US citizens & institutions buy in primary market –foreign citizens & institutions buy in primary market Why do foreigners invest in US? –politically stable country –may be attracted by: low US inflation rate high US interest rate ( when they are high!)

23. US Govt Deficit Treasury Issues Bonds Foreigners Buy Bonds Foreign Concern with US Inflation Foreign Concern with US Interest Rates FederalReserve Central Bank Responsibilities: Domestic and Foreign

24. Capital Flight 1. foreigners sell their US securities 2. foreigners exchange their US $ proceeds for Yen 3. Supply of dollars shifts and price of the dollar falls Yen price of US $ quantity of $ demand for $ supply of $ 4. Federal Reserve may use its Yen Reserves to buy $, stabilize x-ch rate

26. US Dollar and other Currencies, 1988-96 Source: Handbook of International Economic Statistics

27. Real Long Term Interest Rates Real rate = nominal rate minus expected rate of inflation

28. Summary-Vocabulary-Concepts Japanese Yen Thailand Baht capital flight devaluation

29. Outline: Lecture Sixteen The Distribution of National Income by Input Factor Shares The Distribution of Personal Income Trends in US Income Inequality Poverty

30. source: Lecture Six

31. Employee Compensation Proprietor’s Income Corporate Profits Net Interest Rent to Persons  2/3 capital, land, entrepreneurship  1/3

32. If workers are paid a real wage equal to their marginal product of labor, and other factors of production are paid their marginal product of production, does not everybody get their just desserts?

33. Defense of the Status Quo If the economy has constant returns to scale, If labor is paid its marginal product, If capital receives its marginal product, Income paid to labor & capital = output Everybody is paid what they are worth and there is no exploitation MERITOCRACY

34. Variation of Personal Income The Distribution of Income –California Income 1993 Number of tax returns by adjusted gross income (AGI) class –US Income

35. Source: California Statsitical Abstract

37. CA AGI, Frequency & Cumulative Frequency

40. US Family Income 1995

41. Measures of Income Inequality Lorenz Curve –What % of Population Has What % of Income Gini Coefficient –range: 0, meaning equal, to 1, meaning unequal Examples –socialist ideal: equality –life as a crap shoot: any income is equally likely

42. 

43. Equal Distribution of Income

45. Uniform Distribution of Income

46. Gini Coefficient = A/(A+B) A B

47. US Family Income, 1994 Source: US Statistical Abstract

50. Why is Income Distributed So Unevenly? Labor Income is Unevenly Distributed Part-time work –less than 50 weeks per year –less than 36 hours per week

51. “A rising tide lifts all boats”, JFK Economic growth may make everbody better off –increases the size of the pie but the rich may get a larger share of the bigger pie It is possible that the rich get richer and the poor get poorer

52. Income Distribution and GDP Per Capita Source: United Nations Development Programme, Human Development Report, 1993

58. Why has income become more unevenly distributed? Standardize on Male Full-Time Year- Around Workers Ability Premium –90 percentile: $70314 for 1995 males –50 percentile: $31497 –10 percentile: $12920 Education Premium –college grads gain relative to high school grads Experience Premium –older workers gain relative to younger workers

59. Source: Economic Report of the President, 1997

60. Ratio of Median Earnings, Males: College Grad to High School Grad Source: Economic Report of the President, 1997

61. Ratio of Median Earnings, Males: Age 45-54 to 25-34 Source: Economic Report of the President, 1997

62. Growing Wage Differentials Between the Less Skilled and More Skilled: Less Demand for Less Skilled and More Demand for the More Skilled

63. Rich Are Getting Richer smart are getting richer educated are getting richer experienced are getting richer Should we worry about the dull, the ignorant, the young and inexperienced?

64. Poverty in the US US Government Definition of Poverty –Subsistence wage: $15141 in 1994 a non-farm family of four cost of inexpensive but nutritious food times 3 –assume food is 1/3 of budget Trends in Poverty Incidence of Poverty –elderly –children/families headed by single women –rural

66. Incidence of Poverty Among the Aged and the Young Children: 14.9% in 1970 to 21.2% in 1994 Source: Economic Report of the President, 1997

73. Summary-Vocabulary-Concepts input factor shares distribution of personal income distribution of family income frequency distribution of income cumulative distribution of income Lorenz curve Gini coefficient median family income part-time, part-year worker full-time, full-year worker within group variation in earnings ability differential between group variation in earnings education differential experience differential definition of poverty