money and business chapter nine dr. clayton thyne ps 235-001: world politics spring 2009 goldstein...
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Money and Business
CHAPTER NINE
Dr. Clayton ThynePS 235-001: World Politics
Spring 2009
Goldstein & Pevehouse, International Relations, 8/e
Student notes version
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About Money
• No money
• Money provides…
• Money has no…
• Because it depends on the willingness of people to honor and use it, money’s value rests on...
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About Money
• Governments have the job of…• For money to have a stable value, the
political environment must be...– When public confidence that money today will
be exchangeable for needed goods tomorrow erodes, the result is inflation.
• Creation of currency– Old: – Today:
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The Currency System
• Today, each state’s currency can be exchanged for a different state’s currency according to an exchange rate.– Exchange rate (def):
• Exchange rates are important because…
• Currency policies directly affect…
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International Currency Exchange
• Most exchange rates are expressed in terms of the world’s most important currencies:
– Thus the rate for exchanging Mexican peso for Norwegian kroner depends on the value of each, relative to these world currencies.
– Exchange rates that most affect the world economy are those within the G7 states –
– China has held…
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International Currency Exchange
• Changes in the value over time are meaningful.– Standards in currency are…– Value of euro rises (or falls) relative to the
dollar, because…
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International Currency Exchange
• Convertible versus non-convertible currencies– In the absence of a convertible currency, the
holder of such money has...• E.g., foreign Soviet Union • Inflated currencies/hyperinflation
– Hyperinflation:– Very difficult to:
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Table 9.1
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International Currency Exchange
• Hard currency– Money that can be…– States maintain reserves of…– Fixed exchange rates:– Floating exchange rates:– Managed float system:– Government intervention in the currency market
• Coordinated multinational intervention• Argentina• China
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Dark green = use the US dollarLight green = currency pegged to the US dollarDark blue = use the EuroLight blue = currency pegged to the Euro
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Why Currencies Rise or Fall
• In the short term, exchange rates depend on…• In the long term, the value tends …
– Supply: – Demand:– Strong currency vs. weak currency
• Strong currency:
• Weak currency:
• Overvalued currency• Devaluation
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Supply and Demand for the US Dollar
Price (p)
Quantity (q)
Supply (before)
Demand: amount demanded at each price
The US prints more dollars…
Supply (after)
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Supply and Demand for the US Dollar
Price (p)
Quantity (q)
Supply: amount supplied at each price
Demand (before)
The shows instability (invades Iraq, budget deficit)…
Demand (after)
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Central Banks
• In most industrialized countries, politicians know they cannot trust themselves with…
• To enforce self-discipline and enhance public trust in the value of money, these decisions are…
– Limit the amount of money printed and not allowing high inflation.
– In the U.S., the central bank is called the...• Sets the discount rate:
• This controls how fast money goes into the economy:
– Too fast: – Too slow:
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The World Bank and the IMF
• As in security affairs, the main international institutions were created near the end of WWII
• The Bretton Woods system (1944), established:– International Bank for Reconstruction and Development (World
Bank)•
– International Monetary Fund (IMF)•
– Monetary regime (1944-71)•
•
•
• Vietnam War and rise of other economies
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The World Bank and the IMF
• World Bank and IMF are the pillars of the international financial system.– Special Drawing Right (SDR)
• Used to…• Cannot buy goods – • Owned by…
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State Financial Positions
• As currency rates change and state economies grow, the overall positions of states relative to each other shift.
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National Accounts
• The IMF maintains a system of national accounts statistics to keep track of the overall monetary position of each state.– State’s balance of payments is like the financial
statement of a company. It summarizes all the flows of money in and out of the country.
• Current account:
• Capital flows:
• Changes in foreign exchange rates:
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Blue: states w/ a current account surplusRed: states w/ a current account deficit
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International Debt
• Economies contain standing wealth:– Hard currency reserve + capital goods (e.g., factories)– Growth
• •
• Debts– Standing wealth of the state is…
– Even with plenty of standing wealth, debt can…
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International Debt• Why do states go into debt?
–
–
–
• Fiscal policy:
• Monetary policy:
• All transactions have trade-offs, so ultimately…
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The Position of the United States
• The U.S. position in the international economy has shifted over decades.– Post WWII:
•
– 1980s:• •
– 1990s:•
– Early 2000s:•
– Foreign deficit/surplus history• Post WWII: • Early 1980s:• End of 1980s: • Today: • Overall:
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Figure 9.1
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The Position of Russia and Eastern Europe
• States in this region face…
• Most states of the former Soviet bloc became…
– Limited foreign loans– Deep depression– Upward trends for Russia since the financial crisis in
1998
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Table 9.2
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The Position of Asia• Japan’s growth since WWII
– –
• Similar mistakes made by other countries of East and Southeast Asia– Thailand, the Philippines, Malaysia, and Indonesia…
– Stock market…
– Philippines
– China
– South Korea
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Multinational Business
• Although states are the main rule makers for currency exchange and other international economic transactions, these are carried out mainly by…– Most important among these are…
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Multinational Corporations• Companies based in one state with affiliated branches or subsidiaries
operating in other states– Worlds largest corps: http://money.cnn.com/magazines/fortune/global500/2007/
• Types of MNCs:– Industrial corporations
• • •
– Financial corporations• •
– Service corporations•
• Role of MNCs…are they…– – –
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Foreign Direct Investment
• MNCs do not just operate in foreign countries; they also own capital (standing wealth) there.– U.S. and German MNCs own some of the capital
located in Japan.– Japanese MNCs own capital located in the United
States and Germany.
• Direct foreign investment (FDI) involves...• Role of foreign investment
– Pros and cons
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Figure 9.2
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Host and Home Government Relations
• Host country:
• Home country:
• These duel interests can
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Host and Home Government Relations
• In general, an MNC cannot...• In theory, an MNC operates in…
• Conflicts may arise– – – –
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Host and Home Government Relations
• Conflicts with home governments– –
• Security–
• Impact on…