MBA 270 Flashcards
What were the goals of GATT and its successor WTO?
What led to the birth of GATT and WTO?
How did regional agreements affect global trade barriers?
i) Both GATT and its successor WTO aimed at reducing global trade barriers among 164 members, which is a difficult task.
(ii) Regional agreements between groups of countries aimed to reduce trade barriers much quicker than the global organizations.
GATT was established in 1947 under U.S. leadership.
WTO was established via the Uruguay Round Agreement reached in 1993 and became effective in 1995.
Subsequent regional trading blocs were created due to the regional agreements mentioned above.
Levels of Economic Integration
(i) free trade area, (ii) customs union, (iii) common market, (iv) economic union, (v) political union
-The Economic Case
-The Political Case
-Impediments to Integration
-Greater world production and services without trade restrictions
-Increased incentives for political co-ops region’s political weight globally
-Difficult path due to (i) painful cost adjustments, and (ii) national sovereignty
The Case Against Regional Integration
(Trade diversion as opposed to Trade creation)
- Lower-cost external suppliers replaced by higher-cost ones in the free trade area
-Tariff setting = key role
-GATT and WTO do not cover some nontariff’s
Evolution of European Union (EU)
(i) devastation of wester Europe post WW2, and (ii) EU as key global player
Political Structure of the EU
Rather complex and evolving (i) EU Commission, (ii) Council of EU, (iii) EU Parliament,
and (iv) Court of Justice
The Single EU Act
Born out of frustration among member states -Act: ONE market Dec 31, 1992 Still a GOAL!
- removal of frontier controls
- mutual recognition to product standards
- public procurement to nonnational
suppliers
- lift barriers in retail banking & insurance
- removal of all forex
- abolish restrictions on cabotage/truck
The Establishment of the $EU
Maastricht Treaty in 2/1992 Common $EU by 1/1999 – used by 19 of 28 states
Enlargement of the EU
Focused on the eastern EU blocs since end of communism in 1980’s by 1990’s @ 13
British Exit from the EU
Voted out of EU on 6/23/2016
- Since, still negotiating within the UK and among EU…
-Why has it been DIFFICULT for UK’s exit out of EU? Most DIFFICULT for the UK to remain in EU – Why?
The North America Free Trade Agreement
NAFTA among US-Canada-Mexico in 1/1989 Goal: no tariffs!
o NAFTA has been dissolved by the U.S. in early 2017 replaced with the USMCA in 2020
The Andean Community
Pact signed in 1969 by Bolivia, Chile, Ecuador, Columbia, and Peru Collapsed in 1980
Mercosur
Free trade pact between Brazil and Argentina in 1988 modest tariffs & quotas reductions
increased 80% trades by 1980 1990 expansion of pact with Paraguay and Uruguay 2006 expansion with
Venezuela
Central American
Not much progress among (i) Central America Common Market, (ii) Central America Free Trade
Agreement (CAFTA), (iii) Caribbean countries under Caribbean Community (CARICOM), (iv) Caribbean Single
Market & Economy (CSME)
Association of Southeast Asian Nations
Formed in 1967 with goals of (i) free trade, and (ii) co-ops among all
Regional Trade Blocs in Africa
slow progress;
Currently with 19 trade blocs
o Members join other trade blocs
Other Trade Agreements:
-Strong political opposition in the U.S.
-Trans Pacific Partnership (TPP) –> U.S. withdrew in 2017 —>Changed to CPTPP
o Transatlantic Trade and Investment Partnership (TTIP)
The Functions of the Foreign Exchange Market
- Enables the conversion of the currency of one country into the currency of another
- Provides some insurance against foreign exchange risk:
(i) Spot exchange rates - rate determined by supply and demand
(ii) Forward exchange rates - rate agreed upon exchange in the future
(iii) Currency swaps - agreed rate exchange to purchase and agreed rate to sale at two different dates
The Nature of the Foreign Exchange Market
The foreign exchange market is a global network of banks, brokers, and foreign exchange dealers connected by
electronic communications systems
o Most pegged to the US Dollar
o 24/7 open market
o Exchange rates need to be quoted the same to avoid arbitrage
Prices and Exchange Rates
(i) The Law of One Price (ii) Purchasing Power Parity (iii) Money Supply and Price
inflation (iv) Empirical Tests of PPP Theory
Interest Rates and Exchange Rates
: The International Fisher Effect:
i = r + l nominal interest rate = real interest rate + inflation rate
(S1 – S2) / S2 × 100 = i$ – i¥ respective i’s in 2 countries & spot exchange rates @ beginning & end of periods
Investor Psychology and Bandwagon Effects (IP and BE)
Hard to predict, but IP and BE play an important role in
determining short-run exchange rate movements
Summary of Exchange Rate Theories
(i) Good predictors of long-run changes in exchange rates - relative
monetary growth, relative inflation rates, and nominal interest rates; (ii) short-term changes - psychological
factors, investor expectations, and bandwagon effect.
The Efficient Market School
forward exchange rates do the best possible job of forecasting future spot
exchange rates and investing in forecasting services would be a waste of money.
The Inefficient Market School
forward exchange rate market is inefficient and as such investing in forecasting
services can beat the market.
Approaches to Forecasting
(i) fundamental analysis - economic theory to build forecasts; (ii) technical analysis -
past data to predict the future.
Currency Convertible
-Freely convertible: both residents and non-residents can purchase unlimited amounts of foreign
currency with the domestic currency
-Externally convertible: only non-residents can convert their holdings of domestic into a foreign currency
-Nonconvertible: both residents and non-residents are prohibited from converting their holdings of
domestic currency into a foreign currency
Pegged exchange rate
fixed relative to reference currency
managed float system
market forces +
gov/bank interventions = currency’s value
Fixed exchange rate
fixed at agreed-on rate
The Gold Standard
● Mechanics:
● Strength
● The Period Between the World Wars 1918–1939
The Gold Standard: Pegging currencies to gold and guaranteeing convertibility
● Mechanics: Calculate exchange rate from gold par value (amount of currency=1 gold ounce)
● Strength: Good mechanism for achieving balance-of-trade equilibrium by all countries
● The Period Between the World Wars 1918–1939: Inflation from printing money during war led to competitive
devaluations = uncertain gold par values & depleted gold reserves. Ended in 1939.
Bretton Woods System
● IMF’s Role:(1) Discipline via fixed exchange rate; (2) Flexibility via loans = less devaluation & inflation.
● World Bank’s Role: Low interest, IBRD loans and IDA loans to underdeveloped nations
The Collapse of the Fixed Exchange Rate System
Dollar was a reference point. U.S. inflation & balance-of-payments
deficit = dollar devalued. Switched to floating system.
The Floating Exchange Rate Regime
● The Jamaica Agreement: (1) Floating rates deemed acceptable; (2) Gold abandoned as a reserve asset; (3) Total
IMF quotas are increased to $41b at the time. (Now @ $767b & 188 countries)
The Floating Exchange Rate Regime
Exchange Rates Since 1973: Exchange rates much more volatile than they were in 1945-1973 due to major
shocks to the world monetary system, including oil crisis of 1971 and 1979, drop of the $US in 1985, and the
global financial crisis of 2008-2010
The Case for Floating Exchange Rates
1) Monetary Policy Autonomy: countries can decide how to manage $
supply; (2) Trade Balance Adjustments: adjusting trade balance easier; (3) Crisis Recovery: exchange adjustments
allow countries to ↑ exports to help recover from a crisis
The Case for Fixed Exchange Rates:
(1) Monetary Discipline: prevents countries from expanding $ supply &
creating inflation; (2) Speculation: floating ER does not account for how speculation affects inflation; (3)
Uncertainty: can cause changes in inflation; (4) Trade Balance Adjustment/Economic Recovery: trade balances do
not always impact inflation & $ valu
Pegged Exchange Rates
1) Peg value to another major currency; (2) Popular with smaller countries, Ex Belize;
(3) Implications and difficulty including maintaining inflation.
Currency Boards
(1) Means of controlling a country’s currency; (2) Cannot create true fixed exchange but
some features of fixed exchange rate regime, Ex. Honk Kong; (3) Foreign currency reserve backed printed
monies; (4) Implications of currency boards and failed attempts, Ex. Argentina
Financial Crises in the Post–Bretton Woods Era
(1) IMF’s original function to provide money for borrowers,
short-term, to maintain exchange rate; (2) Developed countries no longer borrow from IMF; (3) 1997 rescue
package issue of $110 billion; (4) Differences between a currency crisis, banking crisis, foreign debt crisis (5)
Common cause: high relative price inflation rates, domestic borrowing, gov’t deficit, and asset inflation.
Evaluating the IMF’s Policy Prescription Arguments
. (1) Inappropriate policies: IMF traditionally represents
one-size-fits-all approach instead of specialized. IMF argues it works; (2) Moral Hazard: IMF rescues increasing
due to countries relying on being saved. IMF argues that no bank would test that, failure could cause an economic
collapse; (3) Lack of accountability: IMF has become too powerful with lack of structure and accountability