Week 10-- The emergence of the second global economy

Week 10-- The emergence of the second global economy - The...

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The emergence of the second global economy Shift in foreign investment away from undeveloped to developed nations Economic development project in devel. Nation increasingly financed by international institutions, not private capital Negative effects of FDI in developing countries: Declining “Terms of Trade” – trade deficits because of terms of trade, had not been benefited that much MNC relied on “transfer pricing” (pricing of goods within a single corporation) 40% of international trade today was intra-firm trade (corporation trade with itself (its own subsidiary)) a price established to account for, will set a lower price in higher tax countries for the same goods offered in countries where there is higher price in lower tax countries. Developing countries understood system, became more hostile and felt more negative about this. 1960’s-70’s: rising barriers to FDI in developing countries or “third world” (demands for new international economic order) new taxes, prohibition, third world was unstable, MNC were looking elsewhere and avoiding certain area’s Nationalism/political instability Growth of international trade largely with US, North America, western Europe and japan Gold Crisis 1. End of Bretton woods system 1. Dollar glut/gold crisis Gold finger- ! Between US dollar and gold, late 1940’s dollar gap wasn’t enough $’s in circulation of world to develop… late 1960’s exact opposite, huge surplus in $’s. full employment policies (Keynesian), trade deficit and oil imports, increase FDI by US MNC, massive military spending on nuclear arms and Vietnam war, “Guns and butter” rather than increasing taxes for military expenses, Dollar glut = overvalued dollar in relation to gold and resulted in gold crisis. Run on US gold supply when dollar was overvalued (people all wanted to get money from fed reserve when they didn’t have it). Only had 3 billion$ when they had holdings of 14 billion dollars. 2. Us abandonment of gold standard: hard to relieve pressure on dollar, terminated Bretton woods monetary arrangement 3. Removal of capital: Massive increase in cross border financial transactions, currencies allowed to “float” in relation, removed all capital control. Investors and banks could borrow and lend on an international level. China though is sensitive and maintains artificially low value, buys $’s and holds in reserves to speculate value, does not allow money flow. Europe came to one financial system, though now it is not working very well. Q1: Which of the foliwing plaed pressure on the bretton woods fixed exchange rate system in the
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This note was uploaded on 08/10/2010 for the course INTB 3351 taught by Professor Priest during the Spring '08 term at University of Houston.

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Week 10-- The emergence of the second global economy - The...

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