Open Economy Macroeconomics

An investor has a wide array of investment avenues available in India. It is very important to know how people evaluate these alternatives. Macro economic theory simplifies and states that savings of people automatically becomes investment (S=I). The economic well being of the state depends significantly on how wisely people invest their savings.

This is a study which deals with various investment alternatives in India with special reference to salaried class of people. A sample of five hundred salaried people from Kerala has been taken for examining people’s investment behavior towards various investment opportunities.

Kiriyenko Y.A. Equilibrium Formation in the Goods’ Market in the Open Economy of Ukraine. – Manuscript.
Dissertation submitted for the Candidate degree in Economics, specialty 08.00.01 – Economic Theory and History of Economic Thought. – Ivan Franko National University of Lviv, Lviv, 2013.

This textbook of Economic Policy is made of four parts:
1. Methodological questions;
2. Welfare Economics;
3. Economic models in a closed economy
4. Economic Policy in an open economy.

La politica economica studia il processo decisionale delle istituzioni economiche e finanziarie interne di un paese, come il mercato, lo Stato, la banca centrale, e i comportamenti aggregati degli operatori economici, come le famiglie e le imprese.  Le lezioni contenute in questo volume indicano i filoni principali del pensiero teorico che ha seguito i successi e gli insuccessi dell'azione dei mercati e dei poteri pubblici sui sistemi economici. L'esposizione è articolata in tre parti. Alle questioni metodologiche principali della ricerca in economia e politica, segue, nella prima parte, la trattazione dell'economia del benessere. La seconda parte è dedicata ai modelli con cui il pensiero economico ha perseguito gli obiettivi micro e macroeconomici in economia chiusa. La terza parte tratta gli stessi temi nel contesto di un'economia aperta alla internazionalizzazione dei mercati, in presenza dei vincoli posti dalla loro progressiva globalizzazione.

Indice generale

Premessa
Indice dei grafici
Indice delle tabelle
Acronimi
Piano delle lezioni

Lezione 1-Introduzione

Questioni di metodo

Lezione 2-I limiti dello studioso e la varianza comportamentale
Lezione 3- Errore e non prescrittività delle proposizioni di politica economica
Lezione 4-Analisi economica e principi di politica

Parte prima: l’economia del benessere

Lezione 5-Paradigmi e modelli di politica economica
Lezione 6-Le preferenze sociali
Lezione 7-Miglioramento e ottimo paretiani
Lezione 8-I limiti dell’economia del benessere paretiana e i tentativi di superarli
Lezione 9-La teoria delle votazioni
Lezione 10-Funzioni del benessere, ottimo sociale e teorie della giustizia
Lezione 11-Il mercato e lo Stato
Lezione 12-I due teoremi fondamentali dell’economia del benessere e quello del second best
Lezione 13-I limiti del mercato per gli obiettivi microeconomici
Lezione 14-Il teorema di Coase e le sue critiche
Lezione 15-I limiti del mercato per gli obiettivi macroeconomici

Parte seconda: i modelli di economia chiusa

Lezione 16-La neutralità della moneta
Lezione 17- La Grande Crisi e l’economia di Keynes
Lezione 18- La sintesi neoclassica
Lezione 19- La Nuova Macroeconomia Classica
Lezione 20- Le rifondazioni keynesiana e neoclassica e le relazioni tra disoccupazione e inflazione
Lezione 21- La programmazione economica
Lezione 22- I limiti dell’intervento pubblico
Lezione 23- Le politiche micro: obiettivi e strumenti
Lezione 24- Le politiche micro: alcune applicazioni
Lezione 25- L’analisi costi benefici: aspetti teprici
Lezione 26- L’analisi costi benefici: le fasi procedurali
Lezione 27-La moneta e l’economia monetaria
Lezione 28-La politica monetaria: obbiettivi e strumenti   
Lezione 29-La politica di bilancio: aspetti storici e teorici
Lezione 30-Le politiche del debito pubblico
Lezione 31-La politica dei redditi

Parte terza: la politica economica in economia aperta

Lezione 32-Le teorie del commercio internazionale
Lezione 33-Le politiche commerciali e le giustificazioni del protezionismo
Lezione 34-Bilancia dei pagamenti, regimi valutari e operazioni finanziarie
Lezione 35-Le politiche di riequilibrio della bilancia dei pagamenti
Lezione 36-Il modello di Mundell-Fleming
Lezione 37-Le politiche di mercato aperto

Bibliografia
Indice dei nomi
Indice tematico

This research paper investigated the foreign exchange pass to domestic price in Ethiopia for the year 1981 to 2013 using Auto Regressive Distributed Lag (ARDL) cointegration procedure. The result of the paper shows that foreign exchange pass to domestic price is not significant. Broad money supply, budget deficit and world commodity price index are the main determinates of domestic consumer price in Ethiopia. The result of the paper has policy implication in that an insignificant exchange rate pass-through is thought to provide greater freedom for pursuing an independent monetary policy and facilitates inflation targeting. The research paper therefore, concluded that government can devalue birr as long as it solves the problem of current account deficit but devaluation as policy instrument to stabilize domestic price is not justified based on the result found by this study. However, monetary policy found to be important policy instrument in stabilizing domestic price in Ethiopia.

We assess the impact of oil shocks on euro-area macroeconomic variables by estimating a new-Keynesian small open economy model with Bayesian methods. Oil price is determined according to supply and demand conditions in the world oil market. We find that the impact of an increase in the price of oil depends upon the underlying sources of variation: when the driver

It is difficult at this point in time, with little benefit of hindsight and still in the midst of crisis, to say whether we are passing through yet another of those financial crises that have punctuated economic history from time to time or whether we are indeed at a historic tipping point, a watershed that will fundamentally transform the global economy, the conduct of macroeconomic policy, financial regulation, and international financial institutions. The magnitude of the macroeconomic policy response is nevertheless already apparent.

The present work has as object of study the process of internationalization of the Chinese currency, the renminbi (RMB). Amidst the rival hegemonic nation's leadership, the United States of America (USA), and its "dollar-flexible" monetary standard, China has accumulated economic capabilities (growth potential and technological incorporation) and political capabilities (potential of power expansion in international decision-making processes) to enable its sovereign currency to perform its functions (medium of exchange, unit of account and reserve of value) by public and private agents. This work analyzes the determinants of the use of an international currency (Size of the National Economy and Integration with the World Economy; Size and Development of Financial Markets; “Macroeconomic Responsibility” and Stable Currency Value, and 4) Geopolitical Power) and also the policies adopted to promote RMB internationally, mapping the policies and available evidence in the commercial and financial spheres of international currency use. The study concluded that in the short term the Chinese currency will not threaten the dollar and that in the long term the currency will tread to become a benchmark currency in Asia.

Ce travail a eu pour objectif d'estimer un modèle DSGE en économie ouverte pour la RD Congo en se référant aux techniques bayésiennes pour les données trimestrielles allant de 2002q1 à 2016q4 en vue d'analyser les relations entre les principales variables macroéconomiques et simuler l'impact de quelques principaux chocs sur leur évolution. Les résultats d'estimation du modèle ont été globalement satisfaisants, en particulier en ce qui concerne les tests de convergence de Brooks et Gelman (1998). Les résultats qui ressortent de l'analyse de la décomposition historique ont révélé l'influence des chocs sur le taux de change, sur la production, des chocs de productivité interne et externe comme principaux déterminants de l'évolution du taux directeur et du taux d'inflation domestique. L'analyse de la décomposition historique du taux de dépréciation du taux de change a indiqué l'influence notoire des chocs du taux de change et de politique monétaire dans l'explication de la dépréciation du taux de change durant les trois derniers trimestres de l'année 2016.

The objective of this study is to provide a numerical model of Vietnam's macro economy that examines the impact of alternative exchange rates on both the current and capital accounts of the balance of payments and provides for feedback effect between the external and domestic sectors of the macro economy. The development of this modeling capabilities is intended to offer an easily applicable analytical framework that isolates the impact of alternative exchange rates and parameter assumptions. Close consultation with the technical staff of the Foreign Exchange Department and Research Department in the State Bank of Vietnam has ensured that the design and implementation of the model will prove to be useful to the State Bank. In conjunction with technical training sessions, the modeling process has offered an opportunity for the staff to consider areas of future expansion and disaggregation of the model.

As part of the design and implementation process, the study aims to develop the linkages and feedback effects between changes in the balance of payments and the national income accounts. This modeling framework provides a mechanism to link policies and targets while, at the same time, providing an easy and adaptable means of both forecasting key variables and simulating the interrelationships between economic policy initiatives. As such, the system of equations provides a relatively parsimonious representation of Vietnam’s economy that allows for considerable flexibility in its usage for forecasting and policy simulations

The nature of Vietnam’s economic development process has motivated the design of a model that can grow and evolve with the economy. In addition, considerable effort was made to provide for the disaggregation of Vietnam's trade data by product and geographic origin and destination. This level of detail provided an opportunity to examine the impact of contraction in the Asian markets following the Asian economic crisis and its spread to other regions.

The research examines the impacts of financial liberalization of Vietnam under GATS on the performance of banking sector and securities market from 2007 onwards. In some parts of the research, the scope of analysis has been extended before the 2000s in order to have a full view of selected components of financial liberalization.

By studying the overview of financial liberalization and GATS, looking through Vietnam’ implementation of liberalization commitments under GATS framework, and using a series of indices, indicators and quantitative methods, the research’s objective is to measure the level of financial liberalization and then derive the dual impacts of financial liberalization as promoting financial development and increasing the risk of financial fragility. The research goes on to make appropriate proposals to enhance further financial liberalization in Vietnam.

The paper investigated causal relationships between FDI and international trade in different forms empirically in India. During the last two decade global economic environment has changed rapidly. This change is reflected in widening and intensifying international linkages between FDI and trade. Various countries are favoring foreign capital for attaining rapid and sustained growth. Theoretically two possible linkages between FDI and international trade; one is whether FDI is a substitute for or a complement to international trade and another is whether FDI causes international trade or vice-versa. In this context Johansen cointegration test has been employed followed by VAR to examine the causality between FDI and trade by using the data from UNCTAD and RBI over the period of 1970 to 2013. The findings suggest no long run as well as short run dynamic relationship between FDI and different measures of trade in India.

In the Basel III era, measuring, managing, mitigating and forecasting interest rate risk has become significant. In the first study of its kind, this paper develops a principal component analysis-based forecasting of interest rates of different maturities and stress testing approach in a univariate auto-regressive integrated moving average (ARIMA) framework in the context of India. Debating the existence of multiple representations of interest rates in the Indian market, the study broke down all the short-term, as well as long-term interest rates to derive the optimal principal component of unique interest rates. These unique interest rates are further exercised to forecast the future interest rates through the ARIMA model. The rolling average method was applied to the recently created Indian volatility index (VIX) to place the stress points. The model performance was examined over this stress point of building multiple scenario analysis. The study found that ARIMA (2-1-1) forecasting model of interest rates produced a better forecast result, both in the case of in-sample and out-of-sample performances as well as in stress periods. From the forecasting results, the study found that the proportionate gain in yield is higher as the maturity increases. By examining the stress period on the basis of eight quarters (2007: Q4 of 2009: Q3) rolling average on Indian volatility Indices, the survey concluded that the Indian economy will reach a stable situation signalled by less volatile interest rates post the second quarter of 2018.

Este artículo analiza cuáles han sido los principales obstáculos para el crecimiento económico de México durante los últimos veinticinco años, con particular énfasis en el periodo posterior a la entrada en vigor del Tratado de Libre Comercio de América del Norte (tlcan). Si bien la política económica mexicana desde 1982 se ha guiado por una serie de suposiciones y disposiciones
conocidas como el Consenso de Washington, estas políticas en lugar de estimular un mayor dinamismo de la economía mexicana han acentuado sus problemas estructurales y reducido el potencial de crecimiento del país. También se analiza cómo las políticas fiscal, monetaria, cambiaria
y de libre comercio han obstaculizado el crecimiento económico.
This article analyzes the main obstacles to economic growth in Mexico during the past twenty five years, with a focus on the period after the passage of the North American Free Trade Agreement (nafta). Although Mexican economic policy since 1982 has been guided by a set of assumptions and prescription known as the Washington Consensus, these economic policies rather than spurring faster economic growth have accentuated the structural problems of the Mexican economy and have reduced Mexico’s growth potential. The article also analyzes how fiscal, monetary, exchange rate and free trade policies have hampered economic growth.

Ce papier de recherche vise à montrer que la décision de réduction du taux directeur à 2% prise par le conseil de Bank Al-Maghrib tenu le 17 mars dernier, et ce pour faire face à la crise provoquée par la propagation planétaire de la Covid-19 ne permettrait pas d'atteindre l'objectif escompté. En effet, le taux proposé est largement élevé comparativement au taux qu'aurait obtenu BAM en se basant sur une règle de Taylor reparamétrisée. Suivant nos résultats, le taux de 1.7% serait mieux convenable en cette période de crise majeure, qui se caractérise par des indicateurs sombres sur tous les plans. Mots clés : politique monétaire, conservatisme, taux directeur et règle de Taylor. ‫خالصة‬ : ‫تهدف‬ ‫وباء‬ ‫انتشار‬ ‫لمحاصرة‬ ‫المتخذة‬ ‫الحكومية‬ ‫اإلجراءات‬ ‫بعض‬ ‫ان‬ ‫اظهار‬ ‫الى‬ ‫الورقة‬ ‫هذه‬ ‫بما‬ ‫قوية‬ ‫تكن‬ ‫لم‬ ‫اإلجراءات‬ ‫هذه‬ ‫بعض‬ ‫ان‬ ‫ذلك‬ ‫المتوخاة.‬ ‫األهداف‬ ‫بتحقيق‬ ‫تسمح‬ ‫ال‬ ‫قد‬ ‫كورونا‬ ‫المغربي‬ ‫المركزي‬ ‫البنك‬ ‫يقم‬ ‫لم‬ ‫المثال،‬ ‫سبيل‬ ‫فعلى‬ ‫المطروحة.‬ ‫المعضالت‬ ‫لتجاوز‬ ‫يكفي‬ ‫الفائدة‬ ‫معدل‬ ‫بتخفيض‬ ‫المتسمة‬ ‫الظرفية‬ ‫رغم‬ ‫الدول‬ ‫باقي‬ ‫غرار‬ ‫على‬ ‫المئة‬ ‫في‬ ‫اثنان‬ ‫دون‬ ‫ما‬ ‫الى‬ ‫النقدية‬ ‫السلطات‬ ‫لدى‬ ‫المحافظ‬ ‫الروكوفي‬ ‫الحس‬ ‫بغلبة‬ ‫االعتقاد‬ ‫يعزز‬ ‫مما‬ ‫اقتصادي،‬ ‫انهيار‬ ‫بشبه‬ ‫حدود‬ ‫الى‬ ‫ينزل‬ ‫ان‬ ‫يجب‬ ‫الفائدة‬ ‫معدل‬ ‫ان‬ ‫تحليلنا‬ ‫نتائج‬ ‫بينت‬ ‫فقد‬ ‫المغربية.‬ 7.1 ‫المائة.‬ ‫في‬ ‫المفتاح‬ ‫الكلمات‬ : ‫تايلور.‬ ‫وقاعدة‬ ‫الفائدة‬ ‫معدل‬ ‫المحافظ،‬ ‫الروكوفي‬ ‫الحس‬ ‫التضخم،‬ 1 BAOUZIL Lhoussein est un chercheur en sciences économiques, titulaire d'un doctorat en économie obtenu en 2019 à l'

En este artículo se exponen en primera instancia, las características relevantes de los diversos modelos que se han desarrollado a través de la historia con el objetivo de explicar el comportamiento que presenta la tasa de cambio nominal, y en segundo lugar, se realiza la aplicación empírica del modelo de precios rígidos de determinación de la tasa de cambio para la economía colombiana mediante la técnica econométrica de cointegración. De la aplicación econométrica se destaca que las variables relevantes en el modelo de precios rígidos forman una relación estable de largo plazo, y que los signos de las elasticidades estimadas son conformes a lo planteado por el modelo.

The implications of "perfect" capital mobility for the effective-ness of monetary and fiscal policy and the transmission of disturbances under floating or fixed exchange rates were drawn in the classic paper by Mundell (1963). With fixed rates, fiscal policy moves output but monetary policy does not, and vice versa under flexible rates. These
results are among the most enduring and best—known in international
economics.

The flexible—rate version of the Mundell model was dynamized by
Dornbusch (1976). A crucial feature of both the Mundell and Dornbusch analyses is the exclusion of the exchange rate from the money—market equilibrium condition. However, if the domestic price level is sensitive to changes in the exchange rate, then a movement in the rate changes real balances. Thus fiscal policy influences real balances through the exchange rate, opening the way for effects on home output in the Mundell model or the price level in the Dornbusch version.

In addition to excluding the exchange rate from money—market equi-
librium, Mundell and Dornbusch do not consider constraints of long—run portfolio balance. In a stationary economy, these would require balance on the current account in the long—run equilibrium, while the Mundell—Dornbusch model permits current account imbalance indefinitely.

In this paper we revisit the Mundell—Dornbusch model to study its
behavior with the price level dependent on the exchange rate, and with
long—run portfolio balance constraints. We find that the flexible—rate
fiscal policy result is a special case, dependent on the assumption of
insensitivity of the price level to movement in the exchange rate.

I investigate the downward drift of U.S. interest rates from 1984:Q1 to 2019:Q4. For this, I bring the workhorse two-country New Keynesian model to data on the U.S. and an aggregate of its major trading partners using Bayesian techniques. I show that the U.S. natural (or equilibrium) interest rate recovered from the model has fallen more gradually than the  long-run U.S. real rate, cushioned by productivity shocks. Since inflation expectations became well-anchored in the 90's, this implies that the continued interest rate decline is largely explained by the real rate tracking the natural rate down. Foreign productivity spillovers have had significant effects on the U.S. natural rate and on U.S. output potential. However, foreign shock propagation contributed little to the upswing in U.S. output relative to potential or to sustain inflation close to target both of which are attributed almost entirely to mark-up compression (cost-push shocks) and an accommodative monetary policy in the U.S.

Ce travail a eu pour objectif d'estimer un modèle DSGE en économie ouverte pour la RD Congo en se référant aux techniques bayésiennes pour les données trimestrielles allant de 2002q1 à 2016q4 en vue d'analyser les relations entre les principales variables macroéconomiques et simuler l'impact de quelques principaux chocs sur leur évolution. Les résultats d'estimation du modèle ont été globalement satisfaisants, en particulier en ce qui concerne les tests de convergence de Brooks et Gelman (1998). Les résultats qui ressortent de l'analyse de la décomposition historique ont révélé l'influence des chocs sur le taux de change, sur la production, des chocs de productivité interne et externe comme principaux déterminants de l'évolution du taux directeur et du taux d'inflation domestique. L'analyse de la décomposition historique du taux de dépréciation du taux de change a indiqué l'influence notoire des chocs du taux de change et de politique monétaire dans l'explication de la dépréciation du taux de change durant les trois derniers trimestres de l'année 2016. * Je remercie l'ensemble des collèges de la Direction de la Recherche et des Statistiques et des autres Directions de la Banque Centrale du Congo pour leur précieuses contributions qui ont permis d'améliorer la qualité du présent document. Je remercie également Ole Rummel, Pawel Zabczyck de la Banque d'Angleterre Jorge Restrepo du Fond Monétaire International pour les orientations fournies en vue de l'élaboration du présent travail. Les insuffisances et limites inhérentes à cette étude engagent uniquement la responsabilité de l'auteur. † Economiste à la Banque Centrale du Congo, bertrand.umba@bcc.cd , gilles.umba2014@gmail.com Estimation bayésienne d'un modèle DSGE pour une petite économie ouverte : Cas de la RD Congo 2

This paper analyzes the behavior of international gross capital flows over the business cycle in a two-country DSGE portfolio choice model with shocks to both the transitory and trend components of the endowment. Empirical work on international capital flows documents weakly procyclical, and at times, countercyclical gross financial flows between economies. This observation cannot be reconciled with the predictions of the standard open economy model. These models typically employ transitory productivity shocks as the main driver of business cycles. However the recent theoretical and empirical literatures emphasize the importance of shocks to the trend component of output in matching business cycle moments with data. Our main finding is that transitory shocks result in strongly procyclical gross capital flows, while trend shocks yield weakly countercyclical gross outflows and weakly procyclical gross inflows. Overall, both the magnitude and the sign of correlation coefficients from our model are more consistent with the empirical evidence in the literature. We demonstrate that transitory shocks alone cannot produce results that are in line with the empirical evidence. This finding holds true for different levels of persistence of the transitory shocks. We illustrate that empirically sound predictions are the result of the separation of the transitory and trend shocks.

The principles of the open economy issue and its key factors are analyzed in the paper. The relationship between selected factors and the measure of openness was tested. The received results confirm the necessity to use new approach to understanding the Ukraine’s open economy. The authors suggest a new definition of the open economy and the system of indicators to measure its level.

This study examines the global linkages of selected ASEAN countries composed of Indonesia, Malaysia, Philippines, Singapore and Thailand (hereafter ASEAN-5). While economic growth of each country undoubtedly hinges on domestic developments, it also depends on foreign trade and capital movements in the form of direct and portfolio investments. These external influences are largely driven by global developments, particularly in Japan, other Northeast Asian countries, the United States, the European Union, and within the ASEAN region. While the systematic determinants of the ASEAN-5 countries’ linkages to these regions are relatively stable and robust, our focus is on the short-term dynamics underlying the transmission of income, price and other changes from the global economy.

Based on simulations of an original DGE model of the US, Chinese and Euro area economies with financial frictions and various monetary regimes, the paper shows that the contribution of China in global rebalancing should primarily rely on structural policies aiming at reducing aggregate savings in China. The role of the exchange-rate regime would be minor under standard monetary policies, although more important if monetary policies in advanced countries are constrained, as they are today. Finally, relying only on a change in China’s monetary regime (without structural reforms) could end up in delaying rather than accelerating the rebalancing, depending on China’s policy regarding accumulated reserves.

Majority of the South Asian economies are experiencing continuous deficits in their current account along with high external borrowing. This may question the sustainability of their external obligation in the long run. Therefore, this study examines the long run sustainability of current account imbalances of Seven South Asian economies for the period 1980 to 2014. By applying the recently developed econometric methods, we found that the current account of Maldives and Sri Lanka is sustainable in the long run, while for the rest of the South Asian economies the current account is not sustainable. This results have important policy implications. In particular, the South Asian economies should increase their cooperation with each other in terms of trade and investment to minimize the external sector imbalances and to achieve an increasing growth momentum in the future.

The 2008 financial crisis has emphasized the importance of macro financial linkages. In the financial sector, attention is
now focusing on macro prudential regulations that are geared toward the stability of the financial system as a whole. In
the macro arena, the recognition that price stability was not sufficient to guarantee macroeconomic stability and that
financial imbalances developed despite low inflation and small output gaps has highlighted the need for additional tools
(macro prudential policies) to complement monetary policy in countercyclical management. Emerging markets (EMs)
face different conditions and have key structural features that can have a bearing on the relevance and efficacy of policy
measures. Drawing on Canuto and Ghosh (2013), this note discusses the challenges of dealing with macro financial
linkages and explores the policy toolkit available for dealing with systemic risks, particularly in the context of EMs.

This paper estimates the impact of intra-regional real exchange rate flexibility on East Asian exports. The hypothesis is that the impact would be negative for East Asian countries regardless of their exchange rate regimes. The results validate the hypothesis. The findings show that for Chinese exports the long-run effect is as much as that of a real appreciation of Renminbi. By contrast, for Japanese exports the effect is three-times larger than that of a real appreciation of Yen. The findings imply that a regional currency basket mechanism would lessen the adverse effect of exchange rate flexibility and engineer a collective exchange rate adjustment for resolving global payment imbalance against East Asia.

This paper shows those fundamental macroeconomics variables which explain the behaviour of the real exchange rate (RER) in the Euro Zone, with special emphasis in tariff rates. Diminishing tariffs on imports affect tradable and non-tradable sectors depending on substitution or income effects. When the substitution effect prevails, lower tariffs increase imports and the demand for foreign currency depreciates the euro. When the income effect is stronger, lower tariffs increase demand for goods in both tradable and non-tradable sectors. It boosts productivity and increases relative prices in the non-tradable sector. In the latest effect, tariffs appreciate RER through the Balassa-Samuelson mechanism.

The relationship between international trade flows and key macroeconomic variables such as Export (X) and Import (M) between countries is one of the most widely debated areas among economists and policy makers around the globe. The aim of this paper is to review the extensive literature in this area, focusing on both the theoretical debate and empirical evidence. This review is important in order to derive major conclusions which can be beneficial in macroeconomic debates. In addition, this review could also assist policy makers in formulating the right economic policies to tackle problems such as the high Trade Deficit (TD) and high debt levels associated with international trade flows. The majority of these studies used X, M, Gross Domestic Product (GDP) and related relative competitiveness variables, such as relative prices to examine the economic prosperities various countries’ overtime. The key outcomes from these studies showed that relatively open economies countries seem to achieve higher economic prosperity than the less open economies. However, unbalanced trade, in particular the TD and subsequent rising debt levels with the Rest of the World (RoW), lead to undesirable macroeconomic consequences. In relation to Australia, the bulk of the empirical studies show that Australia has experienced a persistent TD for the past 30 years, with increasing TD as a percentage of the GDP. The key outcomes from empirical studies presented in this paper show that Australia’s growing liabilities with the RoW are intended predominantly for other than investment purposes, which may perhaps weaken the economic prosperity in Australia in the future. In addition, various policy implications which might arise from the debates are also discussed in the paper.