Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 2-1 Chapter 2 World Trade in Goods and Capital 2.1Integration of the World’s.

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 2-1

Chapter 2Chapter 2World Trade in Goods and CapitalWorld Trade in Goods and Capital

2.1 Integration of the World’s Markets

2.2 Balance-of-Payments Statistics

2.3 Exchange Rate Systems

2.4 A History of the International Monetary System

2.5 Summary

Appendix 2-A The Theory of Comparative Advantage

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 2-2

Integration of the world’s marketsIntegration of the world’s markets

Completion of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT)

Creation of the World Trade Organization (WTO) Trend toward free market economies Industrialization of the Far East and Pacific Rim Rise of regional economic linkages and trade pacts Fall of the Iron Curtain Reunification of East and West Germany Hong Kong’s 1997 return to China Entry of China into international trade

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 2-3

U.S. merchandise tradeU.S. merchandise trade

-200

0

200

400

600

800

1000

1975 1980 1985 1990 1995

$ billions

U.S. Imports

U.S. Exports

Net Exports (Exports-Imports)

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 2-4

The U.S. balance of paymentsThe U.S. balance of payments1990 1995

Goods: Export f.o.b. 389.31 576.76

Goods: Import f.o.b. 498.34 749.77

Trade balance 109.03 173.01

Services: Credit 147.70 206.79

Services: Debit 117.63 143.93

Balance on Goods & Serv. 78.96 110.16

Income: Credit 160.42 181.47

Income: Debit 140.71 194.11

Balance on Goods, Serv. & Inc. 59.25 122.80

Current Transfers: Credit 8.79 5.74

Current Transfers: Debit 42.45 35.93

Current Account 92.91 152.98

Source: IMF publication International Financial Statistics.

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 2-5

The U.S. balance of payments (continued)The U.S. balance of payments (continued)

1990 1995

Capital Account: Credit 0.26 0.53

Capital Account: Debit 0.43

Capital Account 0 0

Direct Investment Abroad 29.95 96.90

Dir. Inv. in Reporting Economy 47.92 74.70

Portfolio Investment: Assets 28.80 93.77

Portfolio Investment: Liabilities 4.20 191.39

Other Investment Assets 13.73 79.69

Other Investment Liabilities 43.19 54.61

Financial Account 14.42 50.35

Net Errors and Omissions 44.52 6.66

Overall Balance 33.71 95.88

Source: IMF publication International Financial Statistics.

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 2-6

Classifications of exchange rate systemsClassifications of exchange rate systems

An economist’s classification system»Fixed rate systems

»Floating rate systems

The IMF’s classification system»Pegged systems

»Limited flexibility systems

»More flexible systems

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 2-7

Major exchange rate agreementsMajor exchange rate agreements

» 1946 Bretton Woods Conference

» 1971 Smithsonian Agreement

» 1972 European Joint Float Agreement

» 1976 Jamaica Agreement

» 1979 European Monetary System (EMS) created

» 1985 Plaza Accord

» 1987 Louvre Accord

» 1991 Treaty of Maastricht

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 2-8

A history of the international monetary A history of the international monetary systemsystem

1946 Bretton Woods Conference

»The U.S. dollar is convertible into gold at $35/ounce

»Other currencies pegged to the dollar

»Created IMF and World Bank

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 2-9

History of the international monetary systemHistory of the international monetary system

1971 Exchange rate turmoil

» dollar falls off the gold standard

» most currencies begin to float on world markets

1971 Smithsonian Agreement (Group of Ten)

» dollar devalued to $38/oz of gold

» other currencies revalued against the dollar

» 4.5% band adopted

1972 European Joint Float Agreement

» “The snake” adopted by EEC

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 2-10

History of the international monetary systemHistory of the international monetary system

1976 Jamaica Agreement

» Floating rates declared “acceptable”

1979 European Monetary System (EMS)

» European Exchange Rate Mechanism (ERM) established to maintain currencies within a 2.25% band around central rates

» European currency unit (ECU) created

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 2-11

History of the international monetary systemHistory of the international monetary system

1985 Plaza Accord (Group of Ten)

»The Group of Ten form an agreement to cooperate in controlling volatility and bringing down the value of the dollar

1987 Louvre Accord

»The Group of Five agree to maintain current levels

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 2-12

History of the international monetary systemHistory of the international monetary system

1991 Treaty of Maastricht»European community members agree to pursue a broad agenda of economic, financial and monetary reforms

»A single European currency is proposed as the ultimate goal of monetary union

1999 Introduction of the euro»Emu-zone currencies are pegged to the euro»European bonds convert to the euro

2002 The euro begins public circulation

Kirt C. Butler, Multinational Finance, South-Western College Publishing, 2e 2-13

Mexican peso crisisMexican peso crisis

1.0

0.2

0.4

0.6

0.8

1.2

1994 1995

Mexican stock market value (in local currency)(Dec 31, 1993 = 1.00)

Mexican peso(in U.S.dollars)

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The Asian contagionThe Asian contagion(December 31, 1996 = 1.00)(December 31, 1996 = 1.00)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1996 19981997

Thai bhat

Korean won

Indonesian rupiah