ECON3520 Economics of International Finance
The Complete Exam Bible · S2 2026ECON3520 Overview
- Level 3
- International finance
- University of Queensland
- Problem solving and short answers
What this course builds
Economics of International Finance develops models for international capital movements and exchange rates, then uses them to study policy questions such as current account deficits and capital controls.
- Assessment focus The final exam carries 45% and uses problem solving and short answers.
- Hardest transition Move from signed external accounts to a present value model without losing the opening asset position.
- Core method Write the identity, solve the choice, test feasibility and explain the current account direction.
What you get in the full ECON3520 Exam Bible
- 5 chapters, 36 pages — every examinable topic, week by week
- 16 original practice questions, each with a model answer in the Final exam format
- 5 worked examples, solved the way ECON3520 marks
- 13 computed figures, redrawn from the course’s own numbers
- Exam-morning plan for the Final exam (45%) — what to revise last, where marks are lost
Free on this page: assessment table, chapter map, one worked example, key terms, FAQ. The rest is in the full exam bible.
How ECON3520 is assessed
| Component | Weight | Format |
|---|---|---|
| Assignment 1 (homework) | 10% | Due 4 September in Week 6, problem solving, short answers and data analysis |
| Midterm | 35% | Held 17 September in Week 8, problem solving and short answers |
| Assignment 2 (homework) | 10% | Due 23 October in Week 12, problem solving, short answers and data analysis |
| Final exam | 45% | Examination period, problem solving and short answers |
The four weights are published in the course profile shown in Lecture 1 and total 100%. The captured profile does not publish final exam duration, permitted materials, section count or a hurdle, so check those operational conditions on the current UQ course page.
Assessment structure
The two tests carry 80% together. Each homework task also includes problem solving, short answers and data analysis.
What other students are asking about ECON3520
- Where can I find lecture notes or study guides for ECON3520 at UQ?
- The ECON3520 study guide in AskSia Library covers Economics of International Finance in 5 chapters, with the assessment table, a chapter-by-chapter topic map, key terms and a worked example, free to read on this page.
- Is there a final exam in ECON3520, and how much is it worth?
- Yes. In the offering this AskSia Library guide is built from, Final exam carries 45% of the ECON3520 mark; the full split is Assignment 1 (homework) 10%, Midterm 35%, Assignment 2 (homework) 10%, Final exam 45%.
- What does ECON3520 cover on current account sustainability and niip?
- In AskSia Library's ECON3520 guide, the Current Account Sustainability and NIIP chapter explains terminal conditions, deficit feasibility and four current account identities.
- What does ECON3520 cover on intertemporal consumption and current account shocks?
- In AskSia Library's ECON3520 guide, the Intertemporal Consumption and Current Account Shocks chapter explains budget lines, log utility, shock persistence, terms of trade and capital controls.
- What does ECON3520 cover on production, investment and financial frictions?
- In AskSia Library's ECON3520 guide, the Production, Investment and Financial Frictions chapter explains marginal product, world rates, productivity shocks and collateral limits.
What ECON3520 covers
Five source grounded chapters connect international accounts, household saving, firm investment and uncertainty.
Balance of Payments and International Accounts
Current and financial accounts, double entry, NIIP and valuation changesInternational accounts turn every cross border transaction into a signed pair. The current account records trade in goods and services, income and unilateral transfers. The financial account records changes in asset ownership.
- Current and financial account signs
- Double entry for cross border transactions
- Trade, income and unilateral transfers
- Net international investment position
- Transaction flows versus valuation changes
- Integrated account reconciliation
Current Account Sustainability and NIIP
Terminal conditions, deficit feasibility and four current account identitiesSustainability adds a terminal condition to external accounting.
- Two period NIIP accumulation
- Terminal asset condition
- Trade deficit feasibility
- Current account versus trade balance
- Four current account identities
- Valuation and solvency checks
Intertemporal Consumption and Current Account Shocks
Budget lines, log utility, shock persistence, terms of trade and capital controlsThe two period household model explains current account movements through consumption smoothing.
- Present value budget constraint
- Indifference curves and tangency
- Log utility allocation
- Temporary and permanent output shocks
- Terms of trade and information
- World rates and capital controls
Production, Investment and Financial Frictions
Marginal product, world rates, productivity shocks and collateral limitsA production economy adds firms to the household model. The firm borrows and invests in period 1, produces in period 2 and stops when the marginal product of capital equals the gross world interest rate.
- Production with diminishing returns
- Marginal product and capital cost
- Square root investment solution
- Productivity shock to investment
- World interest rate channels
- Binding collateral constraints
Uncertainty, Precautionary Saving and the Current Account
Two future states, expected utility, feasible roots and precautionary savingFuture output can be uncertain even when its expected value is fixed. The lecture model gives the household equally likely good and bad endowment states and log utility.
- Two state future endowment
- Expected log utility
- State contingent budget constraints
- First order condition and quadratic roots
- Precautionary saving response
- Uncertainty and current account direction
The captured teaching material begins with balance of payments accounting, where every cross border transaction produces offsetting current account and financial account entries.
It then turns those flows into a stock story through the net international investment position, or NIIP, including the separate role of valuation changes.
How the mathematical chain works
The current account block is organised around a two period small open economy. Households choose consumption and saving across time, subject to a present value budget constraint and a world interest rate they cannot influence.
Under log utility, the tangency condition gives a closed form consumption allocation. That allocation determines trade and current account balances. Temporary and permanent output shocks have different effects because a household can borrow to smooth a short lived loss but must adjust consumption more strongly to a permanent loss.
Terms of trade movements enter through the real purchasing power of export output, while capital controls restrict a household that would otherwise borrow.
What changes when firms and uncertainty are added
A production economy adds a firm whose investment equates the marginal product of capital with one plus the world interest rate.
Higher productivity raises desired investment, a higher interest rate lowers it, and a binding collateral limit can hold investment below the unconstrained optimum. The final chapter makes future household income uncertain. Because log utility is concave, the bad state matters more at the margin, so a wider future endowment spread lowers present consumption and creates precautionary saving.
In this setup the current account is the vehicle that carries the buffer into the future.
How this guide is scoped
The course schedule names later exchange rate topics, but the available lecture and tutorial files contain complete teaching material only through the uncertainty topic. This guide stays within those taught materials.
It provides computed figures, worked examples and original practice questions that follow the captured tutorial question types without copying their stems.
Worked example · free
Can positive opening NIIP finance two trade deficits?
- 1Apply B1 star = 1.10 times 30 minus 12, giving closing NIIP of 21.
- 1Apply the terminal condition: zero = 1.10 times 21 plus TB2.
- 1Solve TB2 = minus 23.1, so the second period can also record a trade deficit.
- 1Interpret the path: positive opening external assets are drawn down until terminal NIIP reaches zero.
Key terms
- Current Account
- The Current Account records net trade in goods and services, cross border income and unilateral transfers.
- Financial Account
- The Financial Account records changes in foreign ownership of domestic assets and resident ownership of foreign assets.
- Trade Balance
- The Trade Balance is exports of goods and services minus imports of goods and services.
- Income Balance
- The Income Balance nets investment income and compensation received from abroad against the corresponding payments.
- NIIP
- NIIP is foreign assets held by residents minus domestic assets held by foreign residents at a point in time.
- Valuation Change
- A Valuation Change moves NIIP because asset prices or exchange rates change, without a transaction entering the current account.
- Terminal Condition
- A Terminal Condition fixes the model end point, here requiring the final net foreign asset position to equal zero.
- Domestic Absorption
- Domestic Absorption is consumption plus investment plus government spending within the economy.
- Small Open Economy
- A Small Open Economy trades goods and assets internationally but cannot influence the world interest rate.
- Intertemporal Budget Constraint
- The Intertemporal Budget Constraint equates the present value of consumption with initial assets and the present value of income.
- Marginal Rate of Substitution
- The Marginal Rate of Substitution is the consumption trade off across periods implied by marginal utilities.
- Terms of Trade
- The Terms of Trade is the price of exports relative to the price of imports.
- Marginal Product of Capital
- The Marginal Product of Capital is the extra future output generated by one more unit of present investment.
- Precautionary Saving
- Precautionary Saving is additional present saving used to protect future consumption against income uncertainty.
ECON3520 FAQ
How is the course assessed?
The captured course profile lists two homework assignments worth 10% each, a 35% midterm and a 45% final exam. The assignments combine problem solving, short answers and data analysis. Both tests use problem solving and short answers. The four numeric weights total 100%.
What is published about the final exam?
The course profile places the final exam in the examination period, gives it a 45% weight and describes a mix of problem solving and short answers. It does not state duration, permitted materials, section count or a hurdle in the captured material, so check the current UQ course page for those conditions.
How do I keep current and financial account signs straight?
Start from the economic object. Exports and income receipts are positive in the current account, while imports and income payments are negative. A foreign purchase of a domestic asset is positive in the financial account, and a resident purchase of a foreign asset is negative. Finish by checking that the two account balances offset.
What is the difference between the current account and NIIP?
The current account is a flow over a period, while NIIP is a stock at a date. Current account balances move the stock, but asset price and exchange rate changes can also alter NIIP. Therefore closing NIIP equals opening NIIP plus the current account plus valuation changes.
Why do temporary and permanent shocks affect the current account differently?
A household can borrow to smooth a temporary output loss because future output is unchanged, so present consumption falls less than output and the current account deteriorates more. A permanent loss reduces lifetime resources across both periods, so consumption adjusts more and the current account moves less.
How does a firm choose investment in the production economy?
The firm invests until the marginal product of capital equals one plus the world interest rate. Higher productivity raises desired investment, while a higher world rate lowers it. If a collateral ceiling lies below the unconstrained optimum, the ceiling binds and realised investment equals that limit.
Why does uncertainty create a current account surplus in the model?
The bad future state has especially high marginal utility because log utility is concave. As the gap between good and bad future income widens, the household cuts present consumption and saves more to protect bad state consumption. With zero opening assets and interest in the lecture setup, that extra saving is a current account surplus.
Questions students ask in each ECON3520 chapter
- Why must the current and financial accounts offset?
- A cross border exchange has a real or income side and a financing side. An import, for example, is a negative current account entry, while the foreign seller's acquisition of a domestic claim is a positive financial account entry. Recording both sides makes the balances sum to zero. Chapter 01 · Balance of Payments and International Accounts
- Can a country run trade deficits in both model periods?
- It can when positive opening NIIP is large enough to finance both deficits while still satisfying terminal NIIP of zero. A country beginning with negative NIIP cannot use the same route, because at least one period must generate a surplus that services and retires the liability. Chapter 02 · Current Account Sustainability and NIIP
- What determines the slope of the intertemporal budget line?
- The slope is minus one plus the interest rate. Giving up one unit of present consumption releases resources that become one plus the interest rate units of future consumption. A higher rate therefore makes the line steeper in a graph with future consumption on the vertical axis. Chapter 03 · Intertemporal Consumption and Current Account Shocks
- Why does the firm set marginal product equal to one plus the interest rate?
- An additional unit of investment creates marginal future output but must be financed and repaid with interest. The firm invests while the marginal output exceeds that gross cost and stops at equality. Diminishing marginal product makes the intersection unique in the lecture setup. Chapter 04 · Production, Investment and Financial Frictions
- Does higher uncertainty reduce expected future output in this model?
- No. The good state rises by the same amount that the bad state falls, and the two states have equal probability. Expected future output stays at Q. Present consumption falls because concave utility makes the bad state more painful, not because average future income is lower. Chapter 05 · Uncertainty, Precautionary Saving and the Current Account
How to study for the exam
Begin with sign discipline. Rework the double entry tutorial until each transaction is classified before any sign is assigned. Next, make a one page identity map linking current account to financial account, NIIP, trade plus income, saving minus investment, and income minus absorption. For every numerical model, write the timeline and terminal condition before substituting values.
Practise the log utility allocation until you can move from present value wealth to consumption, trade balance, current account and closing NIIP without changing conventions halfway through. Then drill comparative statics as verbal chains: identify whether a shock is temporary or permanent, state how lifetime resources change, explain consumption smoothing, and only then give the current account direction.
Treat the firm separately by drawing the falling marginal product curve against one plus the world rate. For uncertainty, check the feasible quadratic root and both state budget constraints. In the last revision pass, use the original practice chapter under time pressure and finish every answer with one sentence of economic interpretation.
Recheck current exam conditions on the official UQ course page before the examination period.
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