WK11.1 Agenda • News, Daily good deeds • Project: Homework: Topic by Friday January 14, 2011. How and where to find the impact information? • Presentation: Friday January 21, 2011. • Exam Part II: Wednesday January 26, 2011. • Session III will start January 12, 2011 • Last week article • Monday Discovery 1 Inter Bus, BBA 2010
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Inter Bus, BBA 2010 1
WK11.1 Agenda• News, Daily good deeds• Project: Homework: Topic by Friday January
14, 2011. How and where to find the impact information?
• Presentation: Friday January 21, 2011.• Exam Part II: Wednesday January 26, 2011.• Session III will start January 12, 2011• Last week article• Monday Discovery
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Article• Read the article and answer the questions.• What do you call Chinese exporters that
promote their products to US or EU through Thailand?
• Do you think it’s ok? Will this benefit Thailand?
• What is rule of origin? What is custom union?• What’s 10 billion Yuan equal to Thai baht?
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Picture Discovery
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Picture Discovery
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Picture Discovery
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Picture Discovery• What are the major currencies?
Why should we study about it?• What’s the trend in
2010?
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Picture Discovery• What’s this? • What’s the meaning of
• News, Daily good deeds• Next Wednesday January 19, 2010:
Meditation• Project Next Friday January 21, 2010• Exam Part II Next Wednesday 26, 2010.• More Discovery
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Big Mac Exercise• Law of one price: In an efficient market, the price of the same product
should be the same everywhere, else the process of arbitrage will occur.• If we want the same price as in the US., what should be the exchange
rate?
Countries Big Mac PriceUS= 3.73 $
Theoretical Exchange Rate
Current Exchange Rate
Thailand 70
China 13.2
Japan 320
Australia 4.35
Euro Area 3.38
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Big Mac Exercise• Law of one price: In an efficient market, the price of the same product
should be the same everywhere, else the process of arbitrage will occur.• In the long run what would happen to the exchange rate of each
country?• What are the limitations of using Big Mc index?• Differences in tax, cost of production(rent & labor), consumer
preferencesdifference market position and price
Countries Big Mac PriceUS= 3.73 $
Theoretical Exchange Rate (Implied PPP)
Current Exchange Rate
Thailand 70 18.77 30.4
China 13.2 3.54 6.6
Japan 320 85.7 83.1
Australia 4.35 1.17 1.01
Euro Area 3.38 (1.1)(0.9) (1.3)
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Interest, Inflation and Exchange Rate• Fisher Effect• Real interest rate=Nominal
interest rate-Inflation
• International Fisher Effect
• Concept that the interest rate differentials for any two currencies will reflect the expected change in their exchange rate.
• Where will you invest?• Thailand: Nominal interest 2%,
inflation 5%• China: Nominal interest 3%,
inflation 1%• How can you make money?• Japan: interest rate 1%• Australia: bond yield 6%• According to the Fisher effect,
real interest rate of countries should be the same, what would happen to the exchange rate?
• What are the relationship of interest rate, inflation, and exchange rate?
¥ ¥
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Video Clip Discovery
• US-China currency dispute• What does the US want? Why?• Where does China put the money from trade?• What is hot money? Why they are afraid of it?• What happens when the currency appreciate?
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Reading Discovery
• Read the following article and answer the questions.
• US BOP: Is the sky falling?
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Article: U.S. BOP Deficit
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WK11.3 Agenda• News, Daily good deed• Project update, information, grading criteria• Working on campus• Meditation class on Wednesday January 19,
2011• Lecture• Class wrap up
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International Monetary System• The international monetary system:• Establishes the rules by which countries value and exchange
their currencies and provides a mechanism for correcting imbalances between a country’s international payments and receipts.
IMS IMS
Institutions
Agreements
Process
Rules
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History of IMS
Gold Standard
1880
Bretton Woods Agreement (Fixed
Rate System)1945
Floating Currency Exchange Rate
System1972
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Gold Standard• Each country set its par value(unit of
its currency) to an ounce of gold. Currencies were pegged to gold. The ratio of the two currencies equal to the gold equivalence establishes the exchange rate between the two countries.
• Gold Specie: gold coin as money • Gold Bullion: the government can
print out the money equal to the gold reserve
• Discipline, Security, Flexibility
• WW period, great depression, beggar-thy-neighbor policies
• Bank couldn’t redeem the money for gold at the par value.
• UK: 1 once of gold=4 £
• US: 1 once of gold=20 $
• France: 1 once of gold = 10 franc
• Exchange rate UK/US=? US/France?
• 4/20=1 £ per 5 $, 2 $ per franc
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Bretton Woods AgreementAfter WWII governmental representatives met at Bretton Woods NH, USA. to arrange the plan for post war economic environment to promote peace and prosperity.
The fixed exchange rate restored the gold standard and tied to US dollar. Only the US dollar would be redeemable for gold. US dollar became a mean for international payment and reserve currency for other governments. Each country pledged to maintain the value of its currency + 1% of its par valueAdjustable peg.
Creation of International Bank for Reconstruction and Development (the World Bank): to help finance reconstruction of European economies, build economies of the world’s developing countriesCreation of IMF: To promote international monetary cooperation, facilitate the expansion and balanced growth of international trade, promote exchange stability, maintain orderly exchange arrangements among members, avoid competitive exchange depreciation, assist in the establishment of a multilateral system of payments, give confidence to members, shorten the duration and lessen the degree of disequilibrium in their BOPSpecial Drawing Rights (SDR): An international reserve asset , the unit of account for the IMF and other international organizations
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Bretton Woods System• Triffin Paradox:• A national currency that is also a
reserve currency will eventually run a deficit, which eventually inspires a lack of confidence in the reserve currency and leads to a financial crisis.
• The deficit was financed partly by the shrinking gold reserve and liabilities to other foreign central banks.
• End of Bretton Woods: President Richard Nixon announcement: U.S. dollar inconvertible to gold
• G10 Smithsonian Conference
USA
UK
France
Japan
China
Confidence
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Floating Currency Exchange Rate System
• Floating currency exchange rates:
• Rates that are allowed to float against other currencies and are determined by market forces.
money?• Japan: interest rate 1%• Australia: bond yield 6%• What would happen to
the exchange rate?
¥ ¥
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Balance of Payment• The BOP accounting system is
a double-entry bookkeeping system designed to measure and record all economic transactions between residents of one country and residents of all other countries during a particular time period.
• Assists policy makers in designing appropriate public policies.
• In theory: Current Account + Capital Account + Official Reserves Account = 0
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Summary• History• Theories to explain the direction of:• Interest Rate Inflation
Exchange rate• Balance of payment• Exchange rates affect business operations in three
primary areas: marketing, production, and finance. Examples?
α
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Class Wrap Up• Change?• News, knowledge• Daily good deeds• Language skills• Responsive
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Video Clip Review• US Trade deficit controversial plan.• What’s the government plan to fix the