FIN415 Class Web
Page, Spring '25
Jacksonville
University
Instructor:
Maggie Foley
Term Project Part I
(due with final)
Term
project part II (excel questions)
(due with final)
Weekly SCHEDULE,
LINKS, FILES and Questions
Week |
Coverage, HW, Supplements -
Required |
Supplemental Reaching Materials |
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Marketwatch Stock Trading Game (Pass
code: havefun) 1. URL for your game: 2. Password for this private game: havefun. ·
Click on the 'Join Now' button to get started. ·
If you are an existing MarketWatch member, login. If
you are a new user, follow the link for a Free account - it's easy! ·
Follow the instructions and start trading! 3. Game will be over
on 4/25/2025 5. Game
·
Mutual Fund
Selection Game (FYI) ·
Order Type Explained
Game (FYI) 6. Youtube Instructions · How to Use
Finviz Stock Screener (youtube, FYI)
· How To Win
The MarketWatch Stock Market Game (youtube, FYI)
· How Short
Selling Works (Short Selling for Beginners) (youtube,
FYI)
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The Implications of Trump's Return on U.S.
Trade Policy: Will Tariffs and Trade Wars Resurface? Background Trump's
presidency (2017-2021) featured aggressive trade policies, including
significant tariffs on China and other trading partners, renegotiations of
trade agreements, and discussions about protecting American manufacturing
through quotas and tariffs. Discussion Topics ·
U.S.-China
Trade Relations:
What would a potential second Trump presidency mean for the ongoing
U.S.-China trade war and the tariffs imposed during his first term? ·
Impact
on Global Supply Chains:
How would renewed tariffs or quotas affect global supply chains, especially
in key sectors like technology, agriculture, and automotive manufacturing? ·
Trade
Protectionism vs. Free Trade: Analyzing the economic and political implications of shifting
back toward protectionist policies. ·
Geopolitical Strategies: How might Trump's trade
policies impact relations with allies and adversaries in a changing global
landscape?
Key
Insights
1.
Jobs:
2.
Cost of Living: ·
Prices rise for everyday goods (e.g.,
food, clothes, electronics) when tariffs increase import costs. ·
Higher energy costs can have widespread
effects across industries. 3.
Availability of Goods: ·
Imported goods (e.g., seasonal produce,
luxury cars, and tech gadgets) may become limited or delayed. ·
Domestic alternatives might not match
global competition in terms of quality, price, or innovation. Now,
let’s work on this survey about tariffs. Tariff Survey Game: Tariff Trade Simulation
A simple game No Homework on the topic of Tariff |
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Chapter 1 – Part
1 - World Economy Review of 2024
https://www.imf.org/en/Publications/WEO/weo-database/2024/October/select-country-group Currency Performance Analysis: Changes
from January 1, 2024, to December 31, 2024
https://www.exchange-rates.org/exchange-rate-history/eur-usd-2024 In Class
Discussion Questions Curency_jigsaw_game Self-Produced
Video
Quiz
Homework - Chapter 1-1 (due with the
first midterm exam):
1)
How
tariffs affect trade balances (exports vs. imports) 2)
The
impact of reduced imports on foreign demand for the dollar 3)
How
tariffs might influence global investor confidence in the U.S. economy. 2 Do you prefer a strong dollar or a
weak dollar? Why? ·
Advantages
of a strong dollar:
I.
Cheaper imports for consumers.
II.
Increased purchasing power for U.S. travelers abroad. ·
Advantages of a weak dollar:
I.
Boosts U.S. exports by making them more competitive globally.
II.
Supports domestic manufacturing and job creation. ·
Discuss which groups (e.g., consumers, exporters, travelers) benefit
from each scenario and why you hold your preference. Submission Requirements: Write a 250-300 word response addressing both
parts of the assignment.
Hint:
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Part 2 - In class exercise – practice of
converting currencies 1. If the dollar
is pegged to gold at US $1800 = 1 ounce of gold and the British pound is
pegged to gold at Ł1200 = 1 ounce of gold. What should be the exchange rate
between US$ and British Ł? How much can you make without any risk if the
exchange rate is 1Ł = 2$? Assume that your initial investment is $1800. What
about the exchange
rate set at 1Ł = 1.2$? Solution: 1Ł = 2$ (note
that the exchange rate is set at 1Ł = 1.5$ since $1800 = Ł1500=1 ounce of
gold č $1.5=1Ł). č With $1800, you can buy 1 ounce of gold at US $1800
= 1 ounce of gold. čWith
one ounce of gold, you can sell it in UK at Ł1200 = 1 ounce of gold, so you can
get back Ł1200 č convert Ł to $ at $2=1Ł as given čget back Ł1200 * 2$/Ł = $2400 > $1800, initial
investment č you could make a profit of $600 ($2400 -
$1800=$600) č Yes. 1Ł = 1.2$ (note
that the exchange rate is set at 1Ł = 1.5$ since $1800 = Ł1500=1 ounce of
gold č $1.5=1Ł). č With $1800, you can buy either 1 ounce of gold at US
$1800 = 1 ounce of gold. č With
one ounce of gold, you can sell it in UK at Ł1200 = 1 ounce of gold, so you
can get back Ł1200 č convert
Ł to $ at $1.2=1Ł as givenčget
back Ł1200 * 1.2$/Ł = $1440 < $1800 č you will lose $360 ($1440 - $1800=$-360) č No. č So should convert to Ł first and then buy gold in
UK č With $1800, you can convert to Ł1500 ($1800 /
(1.2$/Ł = Ł1500 ). č buy
gold in UK at Ł1200 = 1 ounce of gold, so you can get back Ł1500/Ł1200 = 1.25
ounce of gold č Sell gold in US at US $1800 = 1 ounce of
gold č So get back 1.25 ounce of gold * $1800 = $2250 > $1800 č you will make a profit of $450 ($2250 -
$1800=$450) č Yes. 1. If the Euro (EUR) to US Dollar
(USD) exchange rate is 1.18, and the US Dollar to Japanese Yen (JPY) exchange
rate is 110, what is the implied exchange rate between Euro and Japanese Yen?
Answer: The implied exchange rate
between Euro and Japanese Yen is approximately 129.80 (110 * 1.18). Explanation: ·
1
EUR = 1.18 USD; 1 USD = 110 JPY. So
1.18 USD/EUR * 110 JPY/USD = 1.18 * 110 = 129.80 JPY/EUR (one EUR =
129.80 JPY) ·
Or,
1 EUR = 1.18 USD č 1 USD = (1/1.18) EUR; 1USD
= 110 JPY, so č (1/1.18)EUR = 110 JPY č 1 EUR = 110/(1/1.18) =
129.80 JPY 2. If the Euro to the British
Pound (GBP) exchange rate is 0.85, and the Swiss Franc (CHF) to Euro exchange
rate is 1.10, what is the implied exchange rate between British Pound and
Swiss Franc? Answer: The implied exchange rate
between British Pound and Swiss Franc is approximately (1/0.85)/1.1 = 1.07 CHF/GBP č one GBP is worth 1.07 CHF Explanation: ·
1
EUR = 0.85 GBPč 1 GBP = (1/0.85) EUR, 1
CHF = 1.10 EUR, so (1/0.85) EUR/ GBP / 1.1 EUR/CHF = (1/0.85)/1.1 CHF/EUR =
1.07 CHF/GBP ·
Or
1 EUR = 0.85 GBP, 1 CHF=1.1 EUR č 1 EUR = (1/1.1) CHF, so 1
EUR = 0.85 GBP = (1/1.1) CHF č 1 GBP = (1/1.1)/0.85 =
1.07 CHF 3. If the Australian Dollar
(AUD) to US Dollar exchange rate is 0.75, and the Canadian Dollar (CAD) to US
Dollar exchange rate is 1.25, what is the implied exchange rate between
Australian Dollar and Canadian Dollar? Answer: The implied exchange rate
between Australian Dollar and Canadian Dollar is 0.60 (0.75 / 1.25). Explanation: ·
1
AUD = 0.75 USD, 1 CAD = 1.25 USD, So 1 AUD can get 0.75 USD, and since 1 USD
can get (1/1.25=0.8) 0.8 CAD, so 1 AUD = 0.75 *(1/1.25) = 0.6 CAD. So one AUD
is worth 0.6 CAD. ·
Or,
0.75USD/AUD * (1/1.25) CAD/USD = 0.75 * 0.8 CAD/AUD = 0.6 CAD/AUD 4.
Are there any arbitrage opportunities based
on the information provided below? Why or why not?
Homework chapter1-2 (due with the first
midterm exam) 1.
If the dollar is pegged to gold at US $1800 = 1 ounce of
gold and the British pound is pegged to gold at €1500 = 1 ounce of gold. What
should be the exchange rate between US$ and Euro €? How much can you make
without any risk if the exchange rate is 1€ = 1.5$? (hint: $1800 č get gold
č sell
gold for euro č convert
euro back to $) How much can you make without any risk if
the exchange rate is 1€ = 0.8$? (hint: $1800 č
get euro č buy gold using euro č
sell gold for $) Assume that your initial
investment is $1800. (answer: $1.2/euro, $450, $900) 2.
If USD to the Chinese Yuan (CNY)
exchange rate is 7.35, and USD to the Indian Rupee (INR) exchange rate is
94.20, what is the implied exchange rate between Chinese Yuan and Indian
Rupee, eg 1 CNY = ? INR? (answer: 1
CNY = 12.816 INR) 3.
If the New Zealand Dollar (NZD) to
Australian Dollar (AUD) exchange rate is 1.05, and the Singapore Dollar (SGD)
to New Zealand Dollar exchange rate is 0.94, what is the implied exchange
rate between Singapore Dollar and Australian Dollar? (answer: 1 AUD = 1.013 SGD, or 1 SGD = 0.987 AUD) |
Swiss franc carry trade
comes fraught with safe-haven rally risk (FYI) By Harry Robertson September 2, 20241:03 AM EDTUpdated 5 months ago LONDON, Sept 2 (Reuters) - As investors turn to the Swiss
franc as an alternative to Japan's yen to fund carry trades, the risk of the
currency staging one of its rapid rallies remains ever present. The Swiss franc has long been used in the popular strategy
where traders borrow currencies with low interest rates then swap them into
others to buy higher-yielding assets. Its appeal has brightened further as the yen's has dimmed. Yen
carry trades imploded in August after the currency rallied hard on weak U.S.
economic data and a surprise Bank of Japan rate hike, helping spark global
market turmoil. The Swiss National Bank (SNB) was the first major central bank
to kick off an easing cycle earlier this year and its key interest rate
stands at 1.25%, allowing investors to borrow francs cheaply to invest
elsewhere. By comparison, interest rates are in a 5.25%-5.50% range in
the United States, 5% in Britain, and 3.75% in the euro zone. "The Swiss franc is back as a funding currency,"
said Benjamin Dubois, global head of overlay management at Edmond de
Rothschild STABILITY The franc is near its highest in eight months against the
dollar and in nine years against the euro , reflecting its status as a
safe-haven currency and expectations for European and U.S. rate cuts. But investors hope for a gradual decline in the currency's
value that could boost the returns on carry trades. Speculators have held on to a $3.8 billion short position
against the Swiss franc even as they have abruptly moved to a $2 billion long
position on the yen , U.S. Commodity Futures Trading Commission data shows. "There is more two-way risk now in the yen than there has
been for quite some time," said Bank of America senior G10 FX strategist
Kamal Sharma. "The Swiss franc looks the more logical funding currency
of choice." BofA recommends investors buy sterling against the franc ,
arguing the pound can rally due to the large interest rate gap between
Switzerland and Britain, in a call echoed by Goldman Sachs. The SNB appears set to cut rates further in the coming months
as inflation dwindles. That would lower franc borrowing costs and could weigh
on the currency, making it cheaper to pay back for those already borrowing
it. Central bankers also appear reluctant to see the currency
strengthen further, partly because of the pain it can cause exporters. BofA
and Goldman Sachs say they believe the SNB stepped in to weaken the currency
in August. "The SNB will likely guard against currency appreciation
through intervention or rate cuts as required," said Goldman's G10
currency strategist Michael Cahill. 'INHERENTLY RISKY' Yet the Swissie, as it is known in currency markets, can be an
unreliable friend. Investors are prone to pile into the currency when they get
nervous, thanks to its long-standing safe-haven reputation. Cahill said the franc is best used as a funding currency at
moments when investors are feeling optimistic. A quick rally in the currency used to fund carry trades can
wipe out gains and cause investors to rapidly unwind their positions, as the
yen drama showed. High levels of volatility or a drop in the higher-yielding
currency can have the same effect. The SNB and Swiss regulator Finma declined to comment when
asked by Reuters about the impact of carry trades on the Swiss currency. As stock markets tumbled in early August, the Swiss franc
jumped as much as 3.5% over two days. The franc-dollar pair has proven sensitive
to the U.S. economy, often rallying hard on weak data that causes U.S.
Treasury yields to fall. "Any carry trade
is inherently risky and this is particularly true for those funded with
safe-haven currencies," said Michael Puempel, FX strategist at
Deutsche Bank. "The main risk is that when yields move lower in a
risk-off environment, yield differentials compress and the Swiss franc can
rally," Puempel added. A gauge of how much investors expect the Swiss currency to
move , derived from options prices, is currently at around its highest since
March 2023. "Considering the central banks, you can see how there may
be more sentiment for some carry players to prefer the franc over the
yen," said Nathan Vurgest, head of trading at Record Currency Management. "The ultimate success of this carry trade might still be
dependent on how quickly it can be closed in a risk-off scenario,"
Vurgest said, referring to a moment where investors cut their riskier trades
to focus on protecting their cash. Get the latest news and expert analysis about the state of the
global economy with the Reuters Econ World newsletter. Sign up here. Reporting by Harry Robertson; Editing by Dhara Ranasinghe and
Alexander Smith Key Insights from the
Article:
1.
Swiss Franc as a Funding
Currency:
2.
Carry Trade Dynamics:
3.
Safe-Haven Risks:
4.
Central Bank Influence:
5.
Strategist Views:
6.
Risks of Swiss Franc
Carry Trades:
7.
Investor Sentiment:
This
analysis highlights the opportunities |
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Part III: Multilateral
Trade vs. Bilateral Trade Multilateralism Explained
| Model Diplomacy (youtube)
Game quiz
Key Takeaways:
1.
Multilateral Trade
Agreements:
2.
Bilateral Trade
Agreements:
Homework chapter1-3 (due with first
midterm exam) 1)
What is bilateralism? What is Multilateralism? 2) Do you advocate
for bilateralism or multilateralism as being more suitable for the U.S.
economy? Why Chapter 2 : International Trade Let’s watch this video together. Imports, Exports, and Exchange Rates: Crash Course Economics
#15 (youtube) Topic 1- What is BOP? The balance of payment of a country contains two
accounts: current and capital. The current account records exports and imports of goods and services
as well as unilateral transfers, whereas the capital account records purchase and sale transactions of foreign
assets and liabilities during a particular year. Summary: Current Account: ·
Definition: The current
account represents the country's transactions in goods, services, income, and
current transfers with the rest of the world. ·
Components: A. Trade Balance: The difference between exports and imports
of goods. B. Services: Transactions related to services (e.g.,
tourism, transportation). C. Income: Receipts and payments of interest, dividends, and
wages. D. Current Transfers: Gifts, aids, and remittances. Capital Account: ·
Definition: The
capital account tracks capital transfers and the acquisition or disposal of non-financial
assets. Now includes financial account. ·
Components: A. Capital Transfers: Non-financial transfers (e.g., debt
forgiveness) and financial transfers. B. Acquisition/Disposal of Non-Financial Assets: Sale or purchase
of non-financial assets, such as patents, goodwill, copy rights, etc, and
financial assets, such as FDI, changes in reserves, portfolio investment, and
financial derivative. Balance of Payments (BoP): ·
Definition: The BoP
is a comprehensive record of a country's economic transactions with the rest
of the world over a specific period. ·
Equation: BoP = Current Account + Capital Account ·
Significance: It
indicates whether a country has a surplus or deficit in its transactions with
the rest of the world. Summary: ·
Current Account:
Records day-to-day transactions, including trade, services, income, and
transfers. ·
Capital Account:
Deals with transfers of non-financial and financial assets and capital
transfers. ·
Balance of Payments:
The overall record combining the Current and Capital Accounts, reflecting a
country's economic relationship with the world. |
Multilateral Trade Agreements With Their Pros, Cons and
Examples 5 Pros and 4 Cons to the World's
Largest Trade Agreements https://www.thebalance.com/multilateral-trade-agreements-pros-cons-and-examples-3305949 BY KIMBERLY AMADEO REVIEWED
BY ERIC ESTEVEZ Updated October
28, 2020 Multilateral trade
agreements are commerce treaties among three or more nations. The
agreements reduce tariffs and make
it easier for businesses to import and export. Since they are
among many countries, they are difficult to negotiate. That same broad scope makes them more
robust than other types of trade agreements once all
parties sign. Bilateral agreements are
easier to negotiate but these are only between two countries. They don't
have as big an impact on economic growth as does a multilateral
agreement. 5 Advantages of multilateral
agreements · Multilateral
agreements make all signatories treat each other equally. No country can
give better trade deals to one country than it does to another. That
levels the playing field. It's especially critical for emerging
market countries. Many of them are smaller in
size, making them less competitive. The Most
Favored Nation Status confers the
best trading terms a nation can get from a trading partner. Developing
countries benefit the most from this trading status. · The
second benefit is that it increases trade for every participant. Their
companies enjoy low tariffs. That makes their exports
cheaper. · The
third benefit is it standardizes commerce regulations for all
the trade partners. Companies save legal costs since they follow the same
rules for each country. · The
fourth benefit is that countries can negotiate trade deals with
more than one country at a time. Trade agreements undergo
a detailed approval process. Most countries would prefer to get one
agreement ratified covering many countries at once. · The
fifth benefit applies to emerging markets. Bilateral trade agreements
tend to favor the country with the best economy. That puts the weaker nation
at a disadvantage. But making emerging markets stronger helps the
developed economy over time. As those emerging markets become
developed, their middle class population increases. That creates
new affluent customers for everyone. 4 Disadvantages of multilateral
trading · The
biggest disadvantage of multilateral agreements is that they are
complex. That makes them difficult and time consuming to
negotiate. Sometimes the length of negotiation means it won't take place
at all. · Second,
the details of the negotiations are particular to trade and business
practices. The public often misunderstands them. As a result, they receive
lots of press, controversy, and protests. · The
third disadvantage is common to any trade agreement. Some companies and
regions of the country suffer when trade borders disappear. · The
fourth disadvantage falls on a country's small businesses. A
multilateral agreement gives a competitive advantage to giant
multi-nationals. They are already familiar with operating in a
global environment. As a result, the small firms can't compete. They lay off
workers to cut costs. Others move their factories to countries with a
lower standard of living. If a region depended on that industry, it
would experience high unemployment rates. That makes multilateral
agreements unpopular. Pros
Cons
Examples Some regional trade agreements are
multilateral. The largest had been the North American
Free Trade Agreement (NAFTA), which was ratified on
January 1, 1994. NAFTA quadrupled trade between the United
States, Canada, and Mexico from its 1993 level to
2018. On July 1, 2020, the U.S.-Mexico-Canada Agreement (USMCA) went
into effect. The USMCA was a new trade agreement between the three countries
that was negotiated under President Donald Trump. The Central American-Dominican
Republic Free Trade Agreement was signed on August 5, 2004. CAFTA-DR
eliminated tariffs on more than 80% of U.S. exports to six countries: Costa
Rica, the Dominican Republic, Guatemala, Honduras, Nicaragua, and El
Salvador. As of November 2019, it had increased trade by 104%, from
$2.44 billion in January 2005 to $4.97 billion. The Trans-Pacific
Partnership would have been bigger than NAFTA.
Negotiations concluded on October 4, 2015. After becoming
president, Donald Trump withdrew from the agreement. He promised to
replace it with bilateral agreements. The TPP was between
the United States and 11 other countries bordering the Pacific
Ocean. It would have removed tariffs and standardized business
practices. All global trade agreements
are multilateral. The most successful one is the General
Agreement on Trade and Tariffs. Twenty-three countries signed GATT in
1947. Its goal was to reduce tariffs and other trade barriers. In September 1986, the Uruguay
Round began in Punta del Este, Uruguay. It centered on extending
trade agreements to several new areas. These included services and
intellectual property. It also improved trade in agriculture and
textiles. The Uruguay Round led to the creation of the World Trade
Organization. On April 15, 1994, the 123 participating governments
signed the agreement creating the WTO in Marrakesh, Morocco. The
WTO assumed management of future global multilateral negotiations. The WTO's first project was the Doha round of
trade agreements in 2001. That was a
multilateral trade agreement among all WTO members. Developing countries
would allow imports of financial services, particularly banking. In so
doing, they would have to modernize their markets. In return, the developed
countries would reduce farm subsidies. That would boost the growth
of developing countries that were good at producing food. Farm lobbies in the United States and
the European Union doomed
Doha negotiations. They refused to agree to lower subsidies or accept
increased foreign competition. The WTO abandoned the Doha round in July 2008. On December 7, 2013, WTO
representatives agreed to the so-called Bali package. All countries
agreed to streamline customs standards and reduce red tape to expedite
trade flows. Food security is an issue. India wants to subsidize food so
it could stockpile it to distribute in case of famine. Other countries worry
that India may dump the cheap food in the global market to gain market
share. |
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Part I - What is the current
account? Current vs. Capital Accounts: What's the
Difference? Interactive Game on Current
Account and Capital Account
Balance of payments:
Current account (video, Khan academy) Quiz
1 Quiz
2 https://www.bea.gov/data/intl-trade-investment/international-transactions
The U.S. current-account deficit widened by $35.9 billion, or 13.1 percent, to $310.9 billion in the third quarter of 2024, according to statistics released today by the U.S. Bureau of Economic Analysis. The revised second-quarter deficit was $275.0 billion. The third-quarter deficit was 4.2 percent of current-dollar gross domestic product, up from 3.7 percent in the second quarter. Capital-Account
Transactions ·
Capital-transfer receipts were $1.6 billion in the third
quarter. The transactions reflected receipts from foreign insurance companies
for losses resulting from Hurricane Helene. For information on transactions
associated with hurricanes and other disasters, see “How do losses recovered from foreign insurance
companies following natural or man-made disasters affect foreign
transactions, the current account balance, and net lending or net borrowing?”.
Capital-transfer payments increased $1.8 billion to $3.3 billion, reflecting
an increase in infrastructure grants. Financial-Account
Transactions ·
Net
financial-account transactions were −$493.6
billion in the third quarter, reflecting net U.S. borrowing from foreign
residents. https://www.bea.gov/news/2024/us-international-transactions-3rd-quarter-2024 Part II - What
is the Capital Account
Balance of payments: Capital account (video,
Khan Academy) Quiz 3 https://fred.stlouisfed.org/tags/series?t=capital+account Chapter
2 part 1 (Due with the first mid term exam) 1.
Can a trade war
help reduce current account deficit? Why or why not? 2.
How do tariffs impact the current account deficit in the context of
ongoing trade disputes? 3.
Below are examples of various
economic activities. Based on each example, determine whether the factor increases
or decreases the current account balance. Write your answers in the
blank space provided. 1)
A local
factory sells more goods overseas, creating jobs and income locally. Effect
on Current Account: ___________ 2)
Workers
abroad send more money back to their families at home. Effect on Current
Account: ___________ 3)
Paying
less interest on loans taken from international lenders. Effect on Current
Account: ___________ 4)
Buying
fewer foreign-made products, such as cars or electronics. Effect on
Current Account: ___________ 5)
More
tourists visit the country and spend money on hotels, food, and services. Effect
on Current Account: ___________ 6)
Buying
more imported products, such as foreign luxury goods. Effect on Current
Account: ___________ 7)
Exporting
fewer goods due to higher costs or less demand abroad. Effect on Current
Account: ___________ 8)
Traveling
abroad and spending more on international vacations. Effect on Current
Account: ___________ 9)
Receiving
less income from foreign investments due to low returns. Effect on Current
Account: ___________ 10)
Paying
more interest on loans owed to foreign banks or investors. Effect on
Current Account: ___________ 11)
Sending
more money to family members living in other countries. Effect on Current
Account: ___________ Optional Homework: 3. Internet
exercises (not required,
information for intereted students only) a. IMF,
world bank and UN are only a few of the major organizations that
track, report and aid international economic and financial
development. Based on information provided in those websites, you could learn
about a country’s economic outlook. · IMF: www.imf.org/external/index.htm · UN: www.un.org/databases/index.htm · World bank: www.worldbank.org’ · Bank of international settlement: www.bis.org/index.htm b. St. Louis
Federal Reserve provides a large amount of recent open economy macroeconomic
data online. You can track down BOP and GDP data for the major industrial
countries. · Recent international economic data: https://research.stlouisfed.org/publications/ Balance of Payments statistics: https://fred.stlouisfed.org/categories/125 |
Current vs. Capital Accounts: What's the
Difference? By THE
INVESTOPEDIA TEAM, Updated June 29,
2021, Reviewed by ROBERT C. KELLY Current
vs. Capital Accounts: An Overview The
current and capital accounts represent two halves of a nation's balance of
payments. The current account
represents a country's net income over a period of time, while the capital
account records the net change of assets and liabilities during a particular
year. In
economic terms, the current account deals with the receipt and payment in
cash as well as non-capital items, while the capital account reflects sources
and utilization of capital. The sum of
the current account and capital account reflected in the balance of payments
will always be zero. Any surplus or deficit in the current account is matched
and canceled out by an equal surplus or deficit in the capital account. KEY
TAKEAWAYS ·
The current and
capital accounts are two components of a nation's balance of payments. ·
The current account
is the difference between a country's savings and investments. ·
A country's capital
account records the net change of assets and liabilities during a certain
period of time. Current Account The
current account deals with a country's short-term transactions or the
difference between its savings and investments. These are also referred to as
actual transactions (as they have a real impact on income), output and
employment levels through the movement of goods and services in the economy. The current account consists of visible trade
(export and import of goods), invisible trade (export and import of services),
unilateral transfers, and investment income (income from factors such as land
or foreign shares). The credit and debit of foreign exchange from these
transactions are also recorded in the balance of the current account. The
resulting balance of the current account is approximated as the sum total of
the balance of trade. Current Account vs. Capital Account Transactions
are recorded in the current account in the following ways: Exports are noted as credits in the balance
of payments Imports are recorded as debits in the
balance of payments The
current account gives economists and other analysts an idea of how the
country is faring economically. The
difference between exports and imports, or the trade balance, will determine
whether a country's current balance is positive or negative. When it is
positive, the current account has a surplus, making the country a "net
lender" to the rest of the world. A deficit means the current account
balance is negative. In this case, that country is considered a net borrower. If
imports decline and exports increase to stronger economies during a
recession, the country's current account deficit drops. But if exports
stagnate as imports grow when the economy grows, the current account deficit
grows. Capital Account The capital account is a record of the
inflows and outflows of capital that directly affect a nation’s foreign
assets and liabilities. It is concerned
with all international trade transactions between citizens of one country and
those in other countries. The
components of the capital account include foreign investment and loans,
banking, and other forms of capital, as well as monetary movements or changes
in the foreign exchange reserve. The capital account flow reflects factors
such as commercial borrowings, banking, investments, loans, and capital. A surplus in the capital account means
there is an inflow of money into the country, while a deficit indicates money
moving out of the country. In this case,
the country may be increasing its foreign holdings. In
other words, the capital account is concerned with payments of debts and
claims, regardless of the time period. The balance of the capital account
also includes all items reflecting changes in stocks. The
International Monetary Fund divides capital account into two categories: The
financial account and the capital account. The term capital account is also used in accounting. It
is a general ledger account used to record the contributed capital of
corporate owners as well as their retained earnings. These balances are
reported in a balance sheet's shareholder's equity section. |
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Topic 2 of Chapter 2 --- Evolution
of international monetary system 1. Finance:
The History of Money (combined) (video, fan to watch) Quiz
2. Timeline of the history of Money:
· Quiz
on Gold Standard
· Quiz
on Bretton Woods System · Quiz
on Exchange Rate Regime
HISTORY OF EXCHANGE RATE SYSTEMS
Videos ·
The Gold Standard Explained in One
Minute (video)
·
The Bretton Woods Monetary System (1944 - 1971) Explained
in One Minute (video) ·
FLOATING AND FIXED EXCHANGE RATE (video)
3.
Bretton Woods Agreement
and System
U.S. Perspective: A Comparison of the Bretton Woods
System and the Post-Bretton Woods System
For class discussion: Why was the Bretton Woods System created
after World War II, and what factors led to its collapse in 1973? (Why the World Abandoned
the Gold Standard, FYI) (Bretton Woods system,
FYI)
|
Bretton Woods Agreement and System By
JAMES CHEN Updated April 28, 2021, Reviewed by SOMER ANDERSON What
Was the Bretton Woods Agreement and System? The Bretton Woods Agreement was
negotiated in July 1944 by delegates from 44 countries
at the United Nations Monetary and Financial Conference held in Bretton
Woods, New Hampshire. Thus, the name “Bretton Woods Agreement.” Under
the Bretton Woods System, gold was the
basis for the U.S. dollar and other currencies were pegged to the U.S.
dollar’s value. The Bretton Woods
System effectively came to an end in the early 1970s when President Richard
M. Nixon announced that the U.S. would no longer exchange gold for U.S.
currency. The
Bretton Woods Agreement and System Explained Approximately
730 delegates representing 44 countries met in Bretton Woods in July 1944 with the principal goals of creating an
efficient foreign exchange system, preventing competitive devaluations of
currencies, and promoting international economic growth. The Bretton Woods
Agreement and System were central to these goals. The Bretton Woods Agreement
also created two important organizations—the International Monetary Fund
(IMF) and the World Bank. While the Bretton Woods System was dissolved in
the 1970s, both the IMF and World Bank have remained strong pillars for the
exchange of international currencies. Though
the Bretton Woods conference itself took place over just three weeks, the
preparations for it had been going on for several years. The primary
designers of the Bretton Woods System were the famous British economist John
Maynard Keynes and American Chief International Economist of the U.S.
Treasury Department Harry Dexter White. Keynes’ hope was to establish a
powerful global central bank to be called the Clearing Union and issue a new
international reserve currency called the bancor. White’s plan envisioned a
more modest lending fund and a greater role for the U.S. dollar, rather than
the creation of a new currency. In the end, the adopted plan took ideas from
both, leaning more toward White’s plan. It wasn't until 1958 that the Bretton
Woods System became fully functional. Once implemented, its
provisions called for the U.S. dollar to be pegged to the value of gold.
Moreover, all other currencies in the system were then pegged to the U.S.
dollar’s value. The exchange rate applied
at the time set the price of gold at $35 an ounce. KEY
TAKEAWAYS ·
The Bretton Woods
Agreement and System created a collective international currency exchange
regime that lasted from the mid-1940s to the early 1970s. ·
The Bretton Woods
System required a currency peg to the U.S. dollar which was in turn pegged to
the price of gold. ·
The Bretton Woods
System collapsed in the 1970s but created a lasting influence on
international currency exchange and trade through its development of the IMF
and World Bank. Benefits
of Bretton Woods Currency Pegging The
Bretton Woods System included 44 countries. These countries were brought
together to help regulate and promote international trade across borders. As
with the benefits of all currency pegging regimes, currency pegs are expected
to provide currency stabilization for
trade of goods and services as well as financing. All
of the countries in the Bretton Woods System agreed to a fixed peg against
the U.S. dollar with diversions of only 1% allowed. Countries were required
to monitor and maintain their currency pegs which they achieved primarily by
using their currency to buy or sell U.S. dollars as needed. The Bretton Woods System, therefore,
minimized international currency exchange rate volatility which helped
international trade relations. More stability in foreign currency
exchange was also a factor for the successful support of loans and grants
internationally from the World Bank. The
IMF and World Bank The
Bretton Woods Agreement created two Bretton Woods Institutions, the IMF and
the World Bank. Formally introduced in December 1945 both institutions have
withstood the test of time, globally serving as important pillars for
international capital financing and trade activities. The
purpose of the IMF was to monitor exchange rates and identify nations that
needed global monetary support. The World Bank, initially called the
International Bank for Reconstruction and Development, was established to
manage funds available for providing assistance to countries that had been
physically and financially devastated by World War II.1
In the twenty-first century, the IMF has 189 member countries and still
continues to support global monetary cooperation. Tandemly, the World Bank
helps to promote these efforts through its loans and grants to governments.2 The Bretton Woods System’s Collapse In 1971, concerned that the U.S. gold
supply was no longer adequate to cover the number of dollars in circulation,
President Richard M. Nixon devalued the U.S. dollar relative to gold. After a
run on gold reserve, he declared a temporary suspension of the dollar’s
convertibility into gold. By 1973 the Bretton Woods System had collapsed. Countries
were then free to choose any exchange arrangement for their currency, except
pegging its value to the price of gold. They could, for example, link its
value to another country's currency, or a basket of currencies, or simply let
it float freely and allow market forces to determine its value relative to
other countries' currencies. The
Bretton Woods Agreement remains a significant event in world financial
history. The two Bretton Woods Institutions it created in the International
Monetary Fund and the World Bank played an important part in helping to
rebuild Europe in the aftermath of World War II.
Subsequently, both institutions have continued to maintain their founding
goals while also transitioning to serve global government interests in the
modern-day. |
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Topic 3: Shall we go back to Gold
Standard for its currency? Play the “Gold Standard Adventure Game” to learn Video: The US should not return
to the gold standard for its currency: Jerome Powell (youtube)
(refer to: https://www.forbes.com/sites/nathanlewis/2020/03/27/what-if-we-had-a-gold-standard-right-now/?sh=1bfba3313e58)
Homework of chapter 2 part ii (due with the first midterm
exam) ·
Do you support returning to gold standard? Why or why not? Hint:
·
What is the Bretton Woods agreement? Why is the Bretton Woods Agreement a
significant event in world financial history? ·
What are
some alternative currencies that have emerged as potential contenders to
challenge the dollar's supremacy? Chinese Yuan? Euro? Yen? Bitcoin?... And
why? (Hint:
according to Why The U.S. Dollar May Be In
Danger (youtube), the three necessary conditions for
a currency to be perceived as a global reserve currency are: An independent
central bank; Strong military backing; A large and liquid debt market).
|
Mar 27, 2020,04:54pm
EDT|30,167 views What
If We Had A Gold Standard System, Right Now? Nathan
LewisContributor https://www.forbes.com/sites/nathanlewis/2020/03/27/what-if-we-had-a-gold-standard-right-now/?sh=1bfba3313e58 For most of the 182 years between 1789 and 1971, the United
States embraced the principle of a dollar linked to gold — at first, at
$20.67/oz., and then, after 1933, $35/oz. Nearly every economist today will
tell you that was a terrible policy. We can tell it was a disaster because,
during that time, the United States became the wealthiest
and most prosperous country in the history of the world. This is economist logic. But, even if some economists might agree with the general
principle, they might be particularly hesitant to apply such monetary
discipline right now, in the midst of economic and financial turmoil. This
kind of event is the whole reason why we put up with all the chronic
difficulties of floating currencies, and economic manipulation by central
banks. Isn't it? So, let's ask: What if we were on a gold standard system, right
now? Or, to be a little more specific, what if we had been on a gold standard
system for the last ten years, and continued on one right now, in the midst
of the COVID-19 panic and economic turmoil? In the end, a gold standard system is just a fixed-value
system. The International Monetary Fund tells us that more than half the
countries in the world, today, have some kind of fixed-value system —
they link the value of their currency to some external standard, typically
the dollar, euro, or some other international currency. They have fixed
exchange rates, compared to this external benchmark. The best of these
systems are currency boards, such as is used by Hong Kong vs. the U.S.
dollar, or Bulgaria vs. the euro. If you think of a gold standard as just a "currency
board linked to gold," you would have the general idea. These currency boards
are functioning right now to keep monetary stability in the midst of a lot of
other turmoil. If you had all the problems of today, plus additional monetary
instability as Russia or Turkey or Korea has been experiencing (or the euro ...),
it just piles more problems on top of each other. Actually, it would probably be easier to link to gold
than the dollar or euro, because gold's value tends to be stable, while the
floating fiat dollar and euro obviously have floating values, by design. If
you are going to link your currency to something, it is easier to link it to
something that moves little, rather than something that moves a lot. Big
dollar moves, such as in 1982, 1985, 1997-98 and 2008, tend to be accompanied
by currency turmoil around the world. But, even within the discipline of a gold standard system, you
could still have a fair amount of leeway regarding central bank activity, and
also various financial supports that arise via the Treasury and Congress. Basically, you could do just about anything that is compatible
with keeping the value of the dollar stable vs. gold. In the pre-1914 era, there was a suite of policies to this
effect, generally known as the "lender of last resort," and
described in Walter Bagehot's book Lombard Street (1873).
Another set of solutions resolved the Panic of 1907, without ever leaving the
gold standard. The Federal Reserve was explicitly designed to operate on a
gold standard system; and mostly did so for the first 58 years of its
existence, until 1971. Others have argued that a functional "free
banking" system, as Canada had in the pre-1914 era, would allow private
banks to take on a lot of these functions, without the need for a central
bank to do so. What could the Federal Reserve do today, while still adhering to
the gold standard? First: It could expand the monetary base, by any amount
necessary, that meets an increase in demand to hold cash (base money). Quite commonly, when
things get dicey, people want to hold more cash. Individuals might withdraw banknotes
from banks. Banks themselves tend to hold more "bank reserves"
(deposits) at the Federal Reserve — the banker's equivalent of a safe full of
banknotes. This has happened, for example, during every major war. During the
Great Depression, the Federal Reserve expanded its balance sheet by a huge
amount, as banks increased their bank reserve holdings in the face of
uncertainty. Nevertheless, the dollar's value remained at its $35/oz. parity. Federal Reserve Liabilities 1917-1941. NATHAN LEWIS Second: The Federal Reserve could extend loans to certain
entities - banks, or corporations - as long as this lending is consistent
with the maintenance of the currency's value at its gold parity. In the pre-1914 era, this was done via
the "discount window." One way this could come about is by swapping
government debt for direct lending. For example, the Federal Reserve could
extend $1.0 trillion of loans to banks and corporations, and also reduce its
Treasury bond holdings by $1.0 trillion. This would not expand the monetary
base. But, it might do a lot to help corporations with funding issues. What the Federal Reserve would not be able to do is: expand the
"money supply" (monetary base) to an excessive amount — an amount
that tended to cause the currency's value to fall due to oversupply, compared
to its gold parity. Now we come to a wide variety of actions that are not really
related to the Federal Reserve, but rather, to the Treasury and Congress. In 1933, a big change was Deposit Insurance. The Federal
Government insured bank accounts. It helped stop a banking panic at the time.
This is a controversial policy even today, and some think it exacerbated the
Savings and Loan Crisis of the 1980s, not to mention more issues in 2008.
But, nevertheless, it didn't have anything to do with the Federal Reserve. In 2009, the stock market bottomed when there was a rule change
that allowed banks to "mark to model" rather than "mark to
market." Banks could just say: "We are solvent, we promise."
It worked. Today, Congress has been making funds available to guarantee
business lending, and for a wide variety of purposes that should help
maintain financial calm. Whether this is a good idea or not will be debated
for a long time I am sure. But, it has nothing to do with the Federal Reserve.
All of these actions are entirely compatible with the gold standard. What about interest rates? Don't we want the Federal Reserve to
cut rates when things get iffy? In the 1930s, interest rates were set by
market forces. Given the economic turmoil of the time, government bond rates,
and especially bill rates, were very low. The yield on government bills
spent nearly
the whole decade of the 1930s near 0%. Markets lower "risk-free" rates
automatically, during times of economic distress, when you just allow them to
function without molestation. Every bond trader already knows this. |
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Why Cryptocurrency Will Never Become
the World’s Primary Currency ·
Economist explains the two
futures of crypto | Tyler Cowen
·
Self produced video: Crypto Cannot Be Cash
·
Self
produced video: The Crypto
Hustle: Easy Money or Easy Mistake?
· Quiz
|