MIM 513 Pacific Rim Economies Class Three – International Monetary Systems, Emerging Markets, & Integration.
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MIM 513 Pacific Rim Economies Class Three – International Monetary Systems, Emerging Markets, & Integration
Guest Lecture on Trade – Mitch Auerbach Quick Review Trade, Ricardo, & FDI Integration / Payments among nations Exchange Markets Theories of exchange Entry Modes Case on “Collapse in Asia” Krugman Article Midterm questions Agenda
Economic Integration - Definition – key word is “integration” - politically, economically, security - Positives- NAFTA / EU - free flow of goods - Customs - Negatives – NAFTA -trade diversion to high cost, but free trade zone suppliers - Association of Southeast Asian Nations - $740B in GDP - Resulted in some lessening of tariffs. -Asia-Pacific Economic Cooperation – 55% worlds GNP -Not a ruling body, more cooperation
Payments among nations -Balance of payments – account of all exchanges of value between residents of one country and ROW. -Trade balance – net exports of both goods / services -Current account balance – credits – debits including trade & income / unilateral transfers -Net foreign Investment – buying versus producing
Exchange Markets Exchange market – conversion of one currency for another Exchange rate – value of one vs. another Domestic currency falls – cheaper exports, costly imports Foreign Currency B-B – Often done at treasury level, not procurement Foreign Markets - to invest excess cash Currency Speculation – Investing in short term volatility Spot vs. forward exchange – spot is today, forward is 30/90/120 Volkswagen example:
Currency Exchange -Spot Market and Central Bank reaction – Models -Forward rate – Hedging formulas “covered interest differential” -Role of interest rates in exchange markets -Bonds vs. fixed exchange -Fisher effect – inflation + interest rate = nominal “i” -The law of one price – price of a product in one country is equal to the price in another * exchange rate (does not hold do to shipping costs. -Same as PPP in exchange rate terms (not labor rates). -Relative PPP considers exchange rates over time + inflation -Bandwagon effect –psychological effects of currency trading
Currency Exchange -Fixed rate – Government chooses to fix the rate of exchange thru: -Buying or selling currency -Fiscal policies such as tariffs -Aggregate supply shift (LM Curve) effects i -Fix rates – Special drawing right (SDR) 4 major currencies a country can “fix” their currency to (Euro, dollar, pound, yen) -Pegged rate – fixed plus a “lever” or some ability to move the rate of exchange -Adjustable or crawling peg – within a established band -Floating rates: -Dirty float – Gov can intervene -Clean float – purely market driven
Currency Exchange – Fixed Argument How does the Government manage & defend the fixed rate? 1.The Gov buys/sell currency in the market to maintain influence over the rate of exchange. 2.Use other controls to effect the market, such as tariffs 3.Alter domestic interest rates by stimulus (aggregate effect) 4.Changing the demand for exports, imports, or capital flows though monetary policies 5.Alter the fixed rate outright (China for ex.) 6.Defending - models
Complex Currency Valuation Rise in US $ 1980- 1985 was due to trade deficit, which was counter intuitive, but large FDI in the US countered the phenomenon in 1995 to present (p. 349)
Currency Systems Gold – Worked until governments changed the value of gold to the dollar leading to devaluation Fixed Bretton Woods – Created too much speculation.
Entry Modes - M&A: failure can occur by: - culture - overpay for the asset - overplay synergies - Due diligence lacking -M&A: Successes: -Block competition -Assets in employees