Chapter 9 Global Finance and Business

Chapter 9 Global Finance and Business - Chapter 9 Global...

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Chapter 9 Global Finance and Business GLOBAILZATION AND FINANCE - Financial integration advantages: * Offers investors and businesses access to overseas markets to spur economic growth * Possibility of better returns on investment for individuals investing in college tuition and retirement - Financial integration risk: * An economic crisis can easily spread to another and another * Economic difficulties can lead to global economic crisis - Crisis of 2008: * Began in United States: citizens taken out home loans they could not pay back, value of homes began to fall => if banks reclaimed would not be able to recover money loaned * Loans resold to other businesses => bank failure because had too much money tied up in bad home loans * Housing crisis led to banking crisis * Unemployment increased worldwide THE CURRENCY SYSTEM - Nearly every state prints its own money. * ABOUT MONEY - Based on national currencies with no inherent value in another country but can be exchanged - Government create as sole legal currency in territory it controls - Traditionally: precious metals as global currency * Gold and Silver: inherent value because of appearance, relatively rare * Became valuable bc world currency, exchanged for future goods * Recently moved away from gold standard => international monetary system * INTERNATIONAL CURRENCY EXCHANGE - National currencies valued against each other - Exchange rate: how much one currency is worth in terms of another * Affect trade, investment, tourism, and economic exchanges * Expressed in most important currencies: US dollar, Euro, Yen * Changes in values over time are what is important - Convertible Currencies: guarantee that the holder of a particular currency can exchange it for another currency * Nonconvertible currency used in black market * Nonconvertible because inflating so rapidly: inflation reduces currency’s value relative to more stable currencies - Hyperinflation: extremely high, uncontrolled inflation (more than 50 percent per month) - Hard currency: money that can readily converted to leading world currencies (now have relatively low inflation) - Reserves: equivalent of stockpiles of gold, backed by hard-currency reserves (not gold) * Industrialized countries hold financial reserves in proportion to size of economies - Fixed Exchange Rates: official rates of exchange for their currencies - Floating Exchange Rates: rates determined by global currency markets where private investors and governments buy and sell currencies * Supply and demand for each currency, with prices constantly adjusting in response to market conditions - Exchange rates adjust to change in longer-term supply and demand through short-term speculative trading - National governments intervene in markets, buying and selling to manipulate value
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- Managed float system: government intervention to manage free-floating currency rates * Cooperation = evidence states recognize long-term interest in mutually beneficial international economy * Governments at disadvantage (control small % of money market)
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