Global Business Strategy
Global Business Strategy BUS 311 10
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This 5 page Class Notes was uploaded by Stephanie Scott on Thursday September 29, 2016. The Class Notes belongs to BUS 311 10 at Washington College taught by Dr. Drischler in Fall 2016. Since its upload, it has received 6 views. For similar materials see Global Business Strategy in Business at Washington College.
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Date Created: 09/29/16
Class Notes 9/29/2016 International Monetary System Questions: 1. What is the International Monetary System? 2. Why is it important? 3. How does it differ from the international financial system? 4. What are the two principle components of Balance of Payments? 5. What are three policy instruments for righting imbalances in Balance of Payments? 6. What are two basic types of exchange rate regimes? 7. What was Bretton Woods? 8. Why is Bretton Woods still Important? The International Monetary System: International monetary system= a set of relationships that determine how international payments are made and how international debts are settled - It is important because: o Trade, investment, and finance depend on the cost and availability of money and credit o The monetary system is the ground rules for capital markets and the international financial system o Actual transactions occur in the financial system Moral Hazard - Negative by-product - Investors are protected from the downside risks of bad investment decisions (get bailed out) - This encourages them to continue to make overly-risky business decisions since they will win either way - Bernanke says: o People spend less effort protecting their things if they have insurance, and investors act in the same way. If they know they will get bailed out regardless of mistakes, they will continue to make the same mistakes - This puts governments in a difficult bind since they want to promote investments in other countries and aspiring businesses, but they also don’t want investors to ignore risk altogether Balance of Payments - Link between domestic economy and the world - 1000s of different kinds of international payments made everyday o goods and services, imports and exports o payment for assets like security and real estate o transfer payments o official transactions Key Components: - Current Account o Imports and exports (trade balance) - Capital Account o Purchases and sales of international assets, net international borrowing Current Account Current account= net goods and services in factor incomes and transfers Trade balance= value of goods exported minus the value of goods imported Service trade= accounting, law, engineering, and tech advice bought and sold as commodities - Investment income (received/paid out in wages and/or repatriated) Remittance= large part of smaller economies, people move to a more prosperous nation (the U.S.) and send money home to their families in poorer countries Example: second largest Haitian population is in L.A., work there and send money home Capital Account - Purchase and sale of assets, international borrowing and lending - Capital inflowsforeigners buying U.S. assets - Capital outflowsU.S. buying assets overseas - Official outflowscentral bank activity o Example: China buying US treasury bonds US Current Account - Large US current account deficit in past, however was decreasing until recently - Result of the growing strength of the US dollar relative to other currencies o Beneficial for capital account but not in current account o Means more imports and lower exports as foreign goods are relatively ‘cheaper’ and US goods are relatively more ‘expensive’ ¨Nightmare Scenario” - If the US dollar tanks then the US Fed would be forced to hike interest rates, resulting in lower economic activity - Issue with the US dollar tanking is that it would cause a crash worldwide o When crashes occur investors retreat to “haven currencies” (called “flight to quality”) which has almost always been the US $... o So what would replace the US $ if it became unstable? Adjustments - Balance of payments is actually always ‘balanced’ since it’s a statistic o Stat discrepancy and change in resource yields the accounting balance o Balance of Power defined by Current – Capital with reserve change and statistical discrepancy calculated in - 3 policy adjustments available for dealing with BoP deficit 1. Monetary Policy= inducing economic contractions and limiting public access to funds o increase interest, increase reserve requirement for commercial banks o make bonds more expensive o can also devalue currency (unless you’re Greece) 2. Fiscal Policy= reduces government spending and increase taxes in order to withdraw purchasing power from the economy trade policy: direct effect on imports and exports, tariffs, NTB’s, subsidies etc. o governments prefer tariffs because it makes foreigners pay the cost of reducing spending, but this can cause foreign governments to retaliate Systemic Requirements - Gilpin provides description of effective international monetary system o Leadership: country must manage reserve currency and provide liquidity, lender of last resort o Adjustment: restore equilibrium in deficit or surplus o Liquidity: provide buffer financial reserves to meet crisis situations o Confidence: trust in the US dollar Bretton Woods - In 1944, meeting in New Hampshire, dominated by the US and UK (one goal was to address the currency devaluation war that was occurring) - Recognized the importance of domestic policy such as full employment and inflation on the systemic economy o Previously governments weren’t always held responsible for economic shifts - Bretton Woods Institutions: o The IMF provides adjustment advice and short term BoP loans o World Bank assists in reconstruction and development o National controls on capital flows to control speculative capital flows (a response to the struggle of dealing with massive cash transfers as countries were trying to repay WW1 debts) - Also created a gold-exchange standard with fixed exchange rates based on a ratio of gold to the US dollar - Post WW2 planners wanted to counter the collapsed world economy that occurred in the 1920’s and 30’s o Fighting fragmentation, currency devaluation, regional economic blocs, regional conflict between great powers - Premise: economic and political collapse after WW1 led to WW2 o World Bank, IMF, and then later WTO were all the brain children of this theory o People wanted to fix a previous inadequate system - Gold exchange standard based on US Dollar o Fundamental part of international system till gold closed in 70’s o Dollar still central to global economy o The British sterling, yen, and euro are good back-ups, Chinese Renminbi won’t be until China allows it to be a more floating currency and opens its markets more o System of USD base can only work as long as confidence in the USD remains China fixes its currency against a basket of 7 other currencies very precisely every day, once it relaxes control it may eventually replace the US as a haven currency - Capital Flows o Original Bretton Woods system promoted free trade o But not capital mobility o In the 20’s and 30’s global financial linkages caused crises in countries to spread and envelope multiple countries o Bretton Woods’ capital controls made it harder for investment funds to move from country to country seeking higher returns Current problems, the US dollar is hot and liquid IMF policy changes have almost come full circle End of Bretton Woods - By the 70’s, recovery of Europe and Japan made Bretton Woods obsolete - US financing Vietnam War and Great Society (social welfare package) by paying tons of US$, increased amount of dollars in circulation o Result was other countries questioned the pegged dollar value to gold - Nixon in ‘71 o Ended the Gold Standard o Imposed import surcharge, effectively revaluing European and Japanese currencies o Smithsonian Agreement devalued US$ but took it off the gold standard Recap 1. How payments get made and debts gets settled 2. Important because the monetary system is the groundwork of the financial system where actual transactions occur 3. Framework is monetary, transactions are financial, determined by the international monetary system 4. Current (trade balance of imports and exports) and capital (purchase and sales of international assets) 5. fiscal (taxes and spending), commercial (trade instruments like tariffs), and monetary policy (government tools) 6. either fixed or floating (small countries are usually fixed, larger are usually floating) 7. during/post WW2 response to economy, agreement to rebuild Europe (IMF and World Bank) development and reconstruction, created institutions that shaped today’s system and still in operation today. Made the United states the central currency and cemented it at the heart of the international economy 8. IMF and World Bank continue, they created a system pegged to the dollar
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