KEY POINTS

1. Countries have different currencies, and the price at which these currencies trade is known as the exchange rate. In learning what determines this exchange rate and how the exchange rate is linked to the rest of the economy, we confront various questions: Why do some countries have fixed exchange rates and others floating? Why do some go from one to the other, often in response to a crisis? Why do some countries have no currency of their own?
2. When countries are financially integrated, it allows them to decouple their level of income from their level of expenditure; the difference between the two is the current account. An important goal is to understand what determines the current account and how the current account is linked to the rest of a nation’s economy. Along the way, we learn how a country’s current account affects its wealth, how its credits and debts are settled, and how the current account changes.
3. Countries differ in the quality of their policy choices and in the quality of the deeper institutional context in which policies are made. In studying international macroeconomic interactions and events, it is essential to understand how policy regimes and institutions affect policy choices and economic outcomes. How does quality of governance affect economic outcomes? Why might some policies, such as a fixed exchange rate, work better in some contexts than others? Do country characteristics affect the costs and benefits of financial globalization?