growth of world trade and world output 1950=100 figure 1.1 1-6
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Growth of World Trade and World Output
0200400600800
100012001400160018002000
1950 1960 1970 1980 1990 1997
TradeGDP Volume
1950=100
Figure 1.1
1-6
Impact of GATT Tariff Rates
05
101520253035404550
1913 1950 1990 2000
France
Germany
Italy
Japan
Holland
Sweden
Britain
United States
Average Tariff Rates on Manufactured Products % of Value
Table 1.1
1-7
Table 1-1 in text
The Shrinking Globe
1500 -1840 1850 - 1930 1950s 1960s
Best average speed ofhorse-drawn coachesand sailing ships, 10mph.
Steam locomotivesaverage 65 mph.Steamships average36 mph.
Propelleraircraft300 - 400mph.
Jetpassengeraircraft,500 - 700mph.
© 1-8
Figure 1.2
CountryShare of World
Output 1963
Share of World
Output 1996
Share of World
Exports 1997United States 40.3% 20.8% 12.6%Japan 5.5% 8.3% 7.76%Germany 9.7% 4.8% 9.9%France 6.3% 3.5% 5.46%United Kingdom 6.5% 3.2% 4.94%Italy 3.4% 3.2% 4.76%Canada 3% 1.7% 3.81%China NA 11.3% 2.85%S. Korea NA 1.7% 2.45%
The Changing Pattern of World Output and Trade
1-9
Table 1.2
Percentage Share of Total FDI Stock1980-1996
0
5
10
15
20
25
30
35
40
45
50
USA UK JPN GER FR Neth ODC DlvngEcon
1980
19851990
19941996
1-10
Figure 1.3
FDI Inflows1980-1996
0
50
100
150
200
250
300
350
400
1985-90
1991 1992 1993 1994 1995 1996 1997
World
Dev Ctry
Dlvg Ctry
USA
China
$B
1-11Figure 1.4
Growth of FDI, World Trade and World Output
0
200
400
600
800
1000
1200
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98
FDI
World Trade
World Output
6-6
Figure 6.2
Increase in the Number of Bilateral Trade Treaties
0
200
400
600
800
1000
1200
1400
1993 1995 1998
Treaties
Countries
6-8
45
40
35
30
25
20
15
10
5
00 5 10 15 20 25 30 35 40 45 50
Turkey
Ecuador
Poland
ColombiaChina
Portugal
Great Britain
United States
Japan
Growth in moneysupply,1985 -1989 %
Consumer prices, 1984 - 1989 (%)
9-20
The Gold Standard• Roots in old mercantile trade.
• Inconvenient to ship gold, changed to paper - redeemable for gold.
• Want to achieve ‘balance-of-trade equilibrium
Japan USA
Trade
Gold
10-1
Between the Wars
• Post WWI, war heavy expenditures affected the value of dollars against gold
• US raised dollars to gold from $20.67 to $35 per ounce.
• Other countries followed suit and devalued their currencies.
10-2
Bretton Woods
• In 1944, 44 countries met in New Hampshire
• Countries agreed to peg their currencies to US$ which was convertible to gold at $35/oz.
• Agreed not to engage in competitive devaluations for trade purposes and defend their currencies.
• Weak currencies could be devalued up to 10% w/o approval.
• IMF and World Bank created.
10-3
IMF• Created to police monetary system by ensuring
maintenance of the fixed-exchange rate.
• Promote int’l monetary cooperation and facilitate growth of int’l trade.
• Wanted to avoid prewar problems, so – Created lending facilities to help countries with trade
deficits.• Persistent borrowings leads to IMF control of a country’s
economic policy.
– Created adjustable parities.
10-5
Sources of Funds
• 182 nations pay into fund according to the size of their economy.
• Funds remain their property.
• Borrower repays loan in 1 to 5 years, with interest.
• No nation has ever defaulted; some are given extensions.
10-7
Membership in the IMF
• Open to any country willing to agree to its rules and regulations.
• Must pay a deposit (quota)
• Quota size reflects global importance of a nation’s economy.
• Quota determines voting powers.
© 10-8
Largest Contributors
18.3
5.7 5.7 5.1 5.1
0
5
10
15
20
US Germany Japan Britain France
USGermanyJapanBritainFrance
10-9
Largest Borrowers
4
11 11.6
21
0
5
10
15
20
25
Thailand Russia Indonesia S. Korea
Thailand
Russia
Indonesia
S. Korea
10-10
$ Billion
(International Bank for Reconstruction and Development)
• Created to fund EUROPE’s reconstruction and help 3rd world countries.
• Overshadowed by Marshall Plan, so bank looked to 3rd world.
• Looked at public sector projects.
• Country borrows money raised by WB bond sales.
• International Development Agency created to help poorest countries.
10-11
What Happened After Bretton Woods?
• Under BW, US required to deliver 1oz of gold to any IMF member that gave US Treasury $35.00.
• 1958 -1971 US ran accumulated deficit of $56 billion.
• US gold reserves shrank from $34.8 billion to $12.2 billion.
• Liabilities to foreign central banks increased from $13.6 billion to $62.2 billion.
10-12
Collapse of the Fixed Exchange System
• August 8, 1971, Nixon left gold standard?
• March 19, 1972, Japan and most of Europe floated their currencies.
• Fully collapsed in 1973.– LBJ policies and Vietnam.
• Floating currencies considered to be a temporary fix.– Still going on today.
10-13
Floating Exchange Rates
• Jamaica Agreement, 1976.
• Floating rates acceptable.– Based primarily on supply/demand.– Managed float involves gov’t
manipulation in currency markets.
• Gold abandoned as reserve asset.
• IMF quotas increased, now $180B
10-15
Managed Currency Floats
• 1985: ‘Group of 5’ met at Plaza Hotel in NY and agreed on ‘right’ level for US dollar.
• G5 became G7 (now G8). Seeks to stabilize exchange rates.
• Difficult due to growth of Fx market.– Annual volume up from $18 billion in 1979 to
$1.5 trillion today.
10-16
Exchange Rate Regimes• Pegged Exchange Rates.
– Peg own currency to a major currency ($).– Popular among smaller nations.– Evidence of moderation of inflation.
• Currency Boards.– Country commits to converting domestic currency on
demand into another currency at a fixed exchange rate.
– Country holds foreign currency reserves equal to 100% of domestic currency issued.
10-19
How IMF Members Determine Exchange Values
0
5
10
15
20
25
30
35
40
45
50 Peg to $
Peg to FFr
Pegged to OtherCurrencyMovement Related toOther CurrencyFree Float
Managed Float
Other
Inflexible
Somewhat Flexible
Flexible
10-20
Figure 10.2
Post-Bretton Woods Financial Crises
• Currency crises:– when a speculative attack on a currency’s exchange value
results in a sharp depreciation of the currency’s value or forces authorities to defend the currency.
• Banking crises:– Loss of confidence in the banking system leading to a run on
the banks.
• Foreign debt crises:– When a country cannot service its foreign debt obligations.
10-21
Crises Have Common Underlying Causes
• Common causes:– High inflation– Widening current account deficit– Excessive expansion of domestic borrowing– Asset price inflation
10-22
Incidence of Currency Crises1975-1997
00.050.1
0.150.2
0.250.3
0.350.4
0.450.5
1975 77 79 81 83 85 87 89 91 93 95 97
Industrial
Emerging Market
Number of Currency Crises per Country
10-23Figure 10.3a
Incidence of Banking Crises 1975-1997
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
0.2
75 77 79 81 83 85 87 89 91 93 95 97
Industrial
Emerging Market
Number of Banking Crises per Country
10-24Figure 10.3b
IMF Policy Prescriptions
• “One size fits all” prescription for countries.• Rescue efforts exacerbate the ‘moral
hazard’ problem.• Too powerful without accountability.
10-34
Impact on the Countries
• Currency devaluation.
• Declining investment.
• Rising prices.
• Rising unemployment.
• Rising poverty.
• Rising resentment?
10-35