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360-11 - Chapter 11 An Introduction to International...

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Chapter 11 – An Introduction to International Finance Chapters 1-10 deal with international trade in goods and services. Chapters 11-21 deal with trade in financial assets – international stocks and bonds, multinational corporations (MNCs) transferring assets, currency trading, monetary issues and policy involving currency manipulation, etc. CH 11 is an overview of the topics covered in the rest of the course. BALANCE OF PAYMENTS (BP) Covered in detail in CH 12, BP is the monetary and financial infrastructure in place to support international trade in goods, services and assets. Commerce Department issues monthly reports on the U.S. trade balance with the rest of the world, by tracking the Current Account (CA) : the flow of exports (X) and imports (M) of goods and services, and the Capital Account (KA) : capital inflows and outflows. Formula: BP = CA +/- KA = 0 BP is part of the National Income Product Accounts, part of Gross Domestic Product: GDP = C + I + G + (X – M) Trade Deficit occurs when M > X (U.S.) Trade Surplus occurs when X > M (Japan) See Figure 11.1 on p. 305, balance of trade (merchandise and services only). EXCHANGE RATES Ex-rate is the price of one money in terms of another currency, or the ratio of two currencies. e = $/£ = $1.7687 / £ (Direct quote, American terms, US $ Equivalent) e = £ / $ = £0.5654 / $ (Indirect quote, European terms, Currency Per US $) Note: a) (1 / 1.7687) = .5654; and b) (1 / .5654) = 1.7687 Ex-rates usually quoted to four decimal places. The currency market is the largest single financial market in the world, about $1.618T traded daily, operating 24/7, see Table 11.1 on p. 306 for daily trading data. Note that the trading volume decreased from about $2T/day in 1998 to $1.6T in 2001, for two reasons: 1 1/23/2012
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1. 2. Note also that U.K. is #1 for currency trading volume ($500B/day), followed by U.S. ($254B/day), together they have about half (47% in 2001) of all currency trading. See Table 11.2 for the percentage share of currency trading, adds up to 200% since all trades involve two currencies (e.g., $ and €). Even though U.K. has more currency trading than U.S.,
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