MIM 513 Pacific Rim Economies

MIM 513 Pacific Rim Economies Class Three – International Monetary Systems, Emerging Markets, & Integration

Guest Lecture on Trade – Mitch AuerbachQuick Review Trade, Ricardo, & FDIIntegration / Payments among nationsExchange MarketsTheories of exchangeEntry ModesCase on “Collapse in Asia”Krugman ArticleMidterm 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? • The Gov buys/sell currency in the market to maintain influence over the rate of exchange. • Use other controls to effect the market, such as tariffs • Alter domestic interest rates by stimulus (aggregate effect) • Changing the demand for exports, imports, or capital flows though monetary policies • Alter the fixed rate outright (China for ex.) • 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

Greenfield • - Pro’s: • - Autonomy • - culture • - knowledge • Con’s: • Slow • Competition from M&A

Advantages and disadvantages of entry modes

MIM 513 Pacific Rim Economies