1. The Global Economy: Finance By: Reba Cox

2. Balance of Payments The summary of all economic transactions between people of one country and all other countries during a given time period. Look at table 18.1

3. Worlds Largest Debtor In 2002 U.S debt measured in stock market value of owners equity was 2.2 trillion dollars. So why do people keep investing? Because U.S Govt’ is stable, inflation is low and from 1995-1999 stock prices generally increased rapidly. The more people feel safe about investing in the U.S the greater our debt gets.

4. Exchange Rates: 2 types Exchange rates determine the cost of internationally trades goods, services and assets. Flexible Rates: determined by the demand for and supply of the various currencies. Fixed Rates: In this system central banks intervene in foreign exchange markets to keep exchange rates constant.

5. Flexible Rates Impact of an increase in U.S output: As our GDP rises, this causes it causes our imports to go up. This causes to supply rate of the dollar to increase vs. another currency. Because it takes more dollars to buy imports than it takes other currencies the dollar depreciates. Look at table 18.3

6. Flexible Rates Impact of Increase in U.S Interest rate: Of our interest rate rises other countries will invest more in the U.S. Causing the supply of dollars to increase, and demand for other currencies to decrease. Resulting in appreciation in the dollar. Look at table 18.4

7. Fixed Rates Look at table 18.5

8. Our Current International Financial system From WW2 until 1973 the world operated on a fixed system know as the Bretton Woods system. Under this banks bought and sold currencies to keep rates constant. By the early 1970’s many countries including the U.S changed to a flexible plan, But still to this day some countries operate on a fixed system.

9. Fixed or flexible; which is better? Fixed Rates Pros: Less risk and uncertainty in this system Fixed Rates Cons: Banks could over or under guess their actions causing the effects to be either to much or to little. Also buying domestic currency reduces currency in circulation. Flexible Rates Pros: Exchange rates are determined by supply and demand not by policy. Flexible Rates Cons: rates can and do change everyday. This results in too-frequent allocations of domestic resources between export and import- competing economies

10. Capitol Flows: Should they be controlled? The capitol market facilitates the flow of funds for the purchase and sale of financial assets and real assets. An increase in net capitol causes a balance of payments deficit. In a country with fixed rates… In a country with flexible rates… Why would a country want to control their capitol flows? What do they do to control the flows? Should we be able to control these flows?

11. Importance of a good banking system Shown in the Asian financial Crisis of 1997-1999 In this crisis the economies of many Asian countries where growing, unemployment was low and inflation was moderate, causing many countries to have a surplus But this was all a mask that covered many companies unsteady markets and investment was risky. This caused a backlash for many Asian economies to turn downward because many companies went under causing output to decrease and unemployment to increase. Nowadays their economies are still shaky and growing.