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CHAPTER 4: THE INTERNATIONAL FLOW OF FUNDS AND EXCHANGE RATES INTRODUCTION TO GLOBAL BUSINESS FVC1 Wade C. Roberts, Ph.D.
Course Mentor: Wade Roberts Education: PhD in Economics –University of Utah Expert Fields: Development, Labor, Public, Health, Gender Current Research (Cambodia): Microfinance, Poverty, Inequality, Socioeconomics INTRODUCTION…
After studying you should be able to: 1- Explainthe balance of payments for a country. 2- Describethe foreign exchange market and its components. 3- Discussthe development of international monetary systems. 4- Explainexchange rate changes over time. 5- Forecastexchange rates using different methodologies.
Introduction…The global economic and financial crises (2008-2009) Worst since the Great Depression (1929-1939) Sometimes referred to as the “Great Recession”YaleGlobal Online: Global Financial Crisis
Introduction…Great Recession effects: YaleGlobal: EffectsCrashing financial markets Wealth losses (trillions of dollars) Failure of banks, securities, and business firms Unprecedented government stimulus packages increasing deficit spending Record low government interest rates Rising unemployment Decline in world trade
Introduction…Impact: The U.S. dollar rose substantially in value against most other currencies Financial Markets collapsed in October 2008
Introduction…Storyline: In 2007–2008 the dollar’s value rose because investors around the world were sellingstocks, commodities, and other risky assets, and, in turn, purchasing dollars
Introduction…Why purchase dollars? The dollar was perceived as an asset that could weather global financial storms due to the belief that the United States would endure the crises. The Dollar Sign?The U.S. dollar is a reserve asset in many countries. (Gold & Oil are denominated in dollars in global markets)
Introduction…When will it be over? We can track the “value of a dollar” to determine when it returns to a “pre-crisis” level. The Wall Street Journal: World Value of the Dollar
Economic & Financial Markets…International trade has increased dramatically over the past several decades. Trading goods/services requiresthat currency be converted Example: A firm in the US would need to covert dollars to Euros to purchase supplies from European firms.
Economic & Financial Markets…Major changes in the world monetary system have had an impact on foreign exchange (forex) markets over the years.
Economic & Financial Markets…The gold standard for benchmarking or pegging currencies was replaced in 1973 by a flexible exchange rate system with freely floating currency values determined by market supply and demand. The Concise Encyclopedia of Economics: Gold Standard
Economic & Financial Markets…Resulting currency fluctuations led management of currency values: Pegging Dollarization Adoption of regional currencies (Euro) Article: Regional Currencies in Germany -Local Competition for the Euro?