For students taking EC134 Topics in Macro and International Economics at Warwick. These tools cover Weeks 1–3, International Finance: they follow the lectures and their notation, and each lists its assumptions under the controls.
Choose an example or move the sliders; each chart redraws, and the text under it explains what changed. Formulas and steps shows the calculation behind every number.
The current account can be built from trade and income flows, CA = TB + NPI + NSI, or from saving and investment, CA = S − I. The chart puts the two routes side by side, and whatever you change they give the same answer: it is the same accounting.
The identities do not say what happens when spending changes. The tool makes you choose: either imports absorb the change and output stays where it was, as in Midland (d), or output moves with spending and the trade balance stays fixed. The answer comes from that choice, not from the identity.
Try Midland and cut government purchases by 6: with imports adjusting, saving rises from 40 to 46 and the current account from −4 to +2, as in Analytical Exercise 2. Switch to output adjusts and the current account does not move at all.
Every transaction enters the balance of payments twice, which is why CA + KA − FA = 0, where FA is the net acquisition of foreign assets less the net incurrence of liabilities. Nine transactions from the lecture and the Week 1 exercises: record the transaction itself, then how it is paid for, and the ledger checks that the accounts balance.
A wrong answer gets a hint about the kind of mistake rather than the answer. The ledger keeps a running total, so after all nine the whole balance of payments sums to zero.
Try the US investor buying £10m of gilts: both entries are in the financial account, UK assets and liabilities both rise by £10m, and the current account does not move.
The current account is a flow; the net international investment position, NIIP = A − L, is a stock. It changes with the current account and with valuation changes: movements in asset prices and exchange rates revalue the positions held at the start of the year.
The second view shows why a debtor can still earn. Net investment income is what the assets earn minus what the liabilities cost, so a country whose assets earn a higher return than its liabilities cost can have positive income and a negative position, as the United States long did.
Try the lecture’s mini example: US share prices up 10% raise the NIIP from 0 to +8 without any new saving, and the pound rising to $1.40 lowers it to −8.6. Then pick Outland: a 10% fall in share prices takes the NIIP from −108 to −138, far more than the current-account deficit of 8.
A small open economy can borrow and lend at the world rate r, and with log utility and β(1 + r) = 1 it keeps consumption equal in both periods. The current account then takes whatever consumption does not: it is the economy’s shock absorber.
A temporary loss is smoothed: consumption falls by about half the loss and the current account takes the rest. A permanent loss is adjusted to: consumption falls one for one and the current account does not move. News of higher income tomorrow raises consumption today, so good news worsens the current account.
Try Midland with a temporary loss of 20.5: consumption falls from 84 to 73.5 in both periods and the current account from −20 to −30. Make the loss permanent and consumption falls by the full 20.5, while the current account stays at −20.
Desired saving rises and desired investment falls with the interest rate. A closed economy settles at the autarky rate, where the two are equal; an open economy borrows or lends at the world rate r*, and the gap between saving and investment is the current account.
The second view shows where the investment schedule comes from. With f(K) = 22√K the firm invests until the return on the last unit equals 1 + r, so investment falls as r rises (Appendix A.4).
Try Ruritania at r* = 4%: saving is 18, investment 28, a deficit of 10. The investment boom, I = 50 − 3r, doubles the deficit to 20, while a closed Ruritania’s rate would rise to 8%. In the second view, lowering r from 10% to 0 raises investment from 100 to 121.
With a forward contract, the pound return on a foreign deposit is known today, and covered interest parity says it must equal the UK rate, which pins the forward rate at F = E × (1 + UK rate)/(1 + foreign rate); otherwise there is riskless profit. Without the hedge the payoff depends on the exchange rate in a year, and uncovered interest parity says expected returns are equal.
The News and policy view rearranges UIP: today’s rate is the expected future rate divided by one plus the interest differential, so news about either moves the pound at once. A surprise cut in UK rates weakens the pound today.
Try the lecture’s CIP example: the forward rate of 0.91 is below the 0.935 that CIP requires, so borrowing €1m and lending pounds makes £25,800 without risk. In the News and policy view, markets revising Eᵉ from 0.808 to 0.85 moves E from 0.792 to 0.833: the pound falls about 5% on the news alone.
Absolute PPP compares what the same basket costs in each country: basket parity is P/P*, and the real exchange rate q = EP*/P says how many UK baskets a US basket buys. The Big Mac index is the one-good version.
Over time, relative PPP says the pound depreciates at the rate by which UK inflation exceeds US inflation, which keeps q constant. With a fixed nominal rate, higher UK inflation appreciates the pound in real terms, and UK goods lose competitiveness.
Try the Big Mac, with The Economist's July 2026 prices: burger parity is 5.49/6.22 = 0.883, so at 0.742 the pound is about 19% overvalued on this measure. In the Over time view, pick Analytical 4 and keep E fixed: with UK inflation at 5% and US inflation at 2%, q falls from 1.024 to about 0.94 in three years.