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The Balance of Payments and Exchange Rates; Global Economy

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The Balance of Payments and Exchange Rates; Global Economy Powered By Docstoc
					 The Balance of Payments
and Exchange Rates; Global
          Learning outcomes
   By studying this section students will be
    able to:
    – understand the arguments for free trade, the
      role of the WTO and GATS
    – understand the balance of payments accounts
    – understand the significance of exchange rates
      to recreation, leisure and tourism
    – distinguish between spot and forward rates of
        Leisure and Trade
   Tourists arriving at
    Koh Phi Phi, Thailand
    bringing foreign
    currency to spend

   Changi Airport
    Singapore. Foreign
    currency earnings
    from transit tourists
                     Free trade
   Ricardo argued that specialisation and trade
    would lead to an increase in total output
    compared to a position of no specialisation and
    trade, based upon greater efficiency of
    – it will benefit countries to specialise in producing
      those goods and services which it is the very best at
      producing (where it has a ‘comparative advantage’
      over other countries)
    – specialisation also leads to economies of scale and
      acquired expertise
         WTO and GATS

 The WTO (World Trade Organisation)
 is the international agency that
 promotes free trade and its GATS
 (General Agreement on Trade in
 Services) is the treaty that seeks to
 operationalise this aim.
                WTO and GATS
   Free trade liberalisation under GATS is based on
    three specific pillars:
    – 1. Market access: Foreign owned companies have
      free access to domestic markets
    – 2. Most Favoured Nation Status: Concessions granted
      to any one country must also be made available on a
      non-discriminatory basis to all other signatories of the
    – 3. National treatment: Foreign investors must be
      treated on an equal basis with domestic investors,
      domestic investors must not receive any favourable
      treatment that could be conceived as protectionist.
      Limits to trade benefits
 extra costs involved in currency
  conversion and risk.
 transport costs can add to production
 many countries seek to protect their home
  markets by protectionist policies.
 most countries wish to maintain some
  balance of production in key strategic
  goods and services so as not to expose
  themselves to over-dependence on foreign
           Trading blocs

 The European Union (EU)
 North American Free Trade Agreement
 The Asia-Pacific Economic Cooperation
  forum (APEC)
 ASEAN Free Trade Agreement (AFTA)
         The terms of trade
 measures the relative prices of what a
  country exports in relation to the prices of
  its imports.
 A persistent argument put forward by
  developing countries is that they face
  unfavourable terms of trade in comparison
  with developed countries.
      The balance of payments
 The balance of payments is an account
  which shows a country’s financial
  transactions with the rest of the world.
 It records inflows and outflows of
 the balance of payments has three main
    – a current
    – a capital
    – and a financial account.
           The current account

   The current account records payments for
    trade in goods and services and is thus
    divided into two parts: visible and invisible
    – Visibles = exports and imports in goods
    – Invisibles = the trade in services or
    Leisure Balance of Payments
   Tourism is an
    important foreign
    currency earner for
    many countries
Tourism vs other exports: Australia
    The capital and financial account
   Investment
    – Direct investment is the direct purchase of firms or
      land or buildings abroad. Portfolio investment is the
      purchase of securities or shares abroad. Such activity
      leads to an outflow of funds, but a potential future
      inflow of profits or dividends under invisibles in the
      current account.
   Lending and borrowing
    – This records international loans.
   Official reserves activity
    – Government use of official reserves of foreign
      currencies is recorded here.
       The Hilton, Sharm, Egypt
   What impact does
    this hotel have on
    Egypt’s Balance of
    – Initial Investment
    – Bills of foreign
    – Imports of goods
      and services
            Government policy
   An acute long-term current account
    deficit will require government
    intervention. This may take the form
    – devaluation or currency depreciation
    – protectionism
                 Exchange rates
   Significance of exchange
    – How does a rise in a
      country’s exchange rate
      affect leisure and tourism?
        Makes imports cheaper (e.g.
         clothes, equipment)
        Makes exports dearer (e.g.
         discourages inbound
Currency movements and prices
Determination of floating exchange
 A floating exchange rate is one which is
  determined in the market without government
 Here the exchange rate is determined, like most
  prices, by the forces of demand and supply.
 Using the Australian $ to stand for all foreign
  currencies, we can identify the main
  determinants of the demand for and supply of
  sterling as follows:
                Exchange Rates
 A fixed exchange rate system is where the price
  of one currency is fixed in terms of another
 Spot and Forward Markets
    – The spot market is the immediate market in foreign
      currency and represents the current market rate.
      Payment is made today and the transaction takes
      place today at today’s rate.
    – The forward market exists to satisfy demand for a
      guaranteed future exchange rate. Payment is made
      today but the transaction is made in the future (e.g. 3
      months) at a rate agreed today.
     Exchange rate and government
 Governments may attempt to influence the
  exchange rate.
 Policy instruments to affect the exchange rate
  consist of
    – interest rates and
    – direct buying and selling of currency by the Central
   Raising interest rates will generally increase the
    demand for a currency as savings are moved
    from overseas banks to domestic banks to
    benefit from higher interest rates.
           High or Low Rate?
   The government faces a dilemma in its
    exchange rate policy as in many other
    policy areas.
    – a lower exchange rate makes export prices
      competitive and discourages imports
    – a higher exchange rate, by cutting import
      prices, helps to combat inflation.
       Learning outcomes
 Bystudying this section students will
 be able to:
  – explain the meaning of globalization
  – explain the meaning of an MNE
  – understand the motives for extending
   operations overseas

   Robertson (1992: 8) describes
    globalization as:
    – “the compression of the world and the
      intensification of consciousness of the world
      as a whole . . . . concrete global
      interdependence and consciousness of the
      global whole in the twentieth century"
       Economic Globalization
 Friedman (1999: 7-8) offers the following
 "[T]he inexorable integration of markets, nation-
  states, and technologies to a degree never
  witnessed before-in a way that is enabling
  individuals, corporations and nation-states to
  reach around the world farther, faster, deeper
  and cheaper than ever before . . . . the spread
  of free-market capitalism to virtually every
  country in the world”
       Economic Globalization
 Refers to the increasing integration of
  economies around the world.
 This integration is evident mainly through
    – trade and financial flows but it also includes
    – the movement of people (labour) and
    – knowledge (technology)
    across international borders
Multinational enterprises in leisure
           and tourism
   Airlines               Entertainment
    – UAL (United)          –   Walt Disney
    – British Airways       –   Time Warner
    – Lufthansa             –   News Corp.
   Electronics             –   Viacom
    – Hitachi               –   Seagram
    – Matsushita           Consumer products
    – Sony                  – Coca-Cola
                            – McDonald's
                            – Nike
        World Airline Alliances

Star Alliance   Air Canada, Air New Zealand, ANA, Asiana
                    Airlines, Austrian, bmi, LOT Polish Airlines,
                    Lufthansa, Mexicana, Scandinavian Airlines,
                    Singapore Airlines, Spanair, Thai Airways
                    International, United and VARIG.
One World       British Airways, Aer Lingus, American Airlines,
                    Cathay Pacific, Iberia, Lan Chile, and Qantas.
Sky Team        Aeromexico, Air France, Alitalia, TSN, Delta and
                   Korean Air.
   Benefits of Globalization
– improved communications
– a more open world
– the advent of new, better and cheaper
– the reduction in barriers to trade
– its contribution to faster economic
        Benefits of Globalization
   Advocates of globalization see the major
    problem that it is not progressing evenly.
    – They note that some countries have been integrated
      into the global economy more quickly than others and
      that these are seeing faster growth and reduced
    – For example free trade policies have brought
      dynamism and greater prosperity to much of East
      Asia, transforming it from one of the poorest areas of
      the world 40 years ago.
       Problems of Globalization
   Here concerns are expressed about
    – the deterioration in the well-being of particular groups
         (these range from whole countries, to workers in developed
         countries who have seen their jobs exported, to workers in
         developing countries who work under conditions of
    – the sovereignty and identity of countries,
    – the disparities of wealth and opportunities among
      countries and people
    – the health of the environment
    – the greater exposure it brings countries to sudden
      and profound economic shocks.
           Meaning and extent of
           multinational enterprise
 An MNE is one which has production or service
  capacity located in more than one country. The
  MNE has a headquarters in a parent country and
  extends its operations into one or more host
 The main ways in which multinational operations
  are extended are by
    – investment in new or ‘greenfield’ capacity
    – by taking an equity stake in a foreign company (i.e.
      buying up shares)
    – or by operating a franchise or alliance with a foreign
Motives for going multinational
   lower labour costs
   lower other costs
   marketing advantages
   scale economies, integration and competition
   extension of product life cycles
   tariff avoidance
   incentives in host economies
Benefits of multinationals on host
   These include
    – extra investment and related effects
        Growth
        Exports
        Employment
        Tax revenue
    – technology and skills transfer
Coca Cola in Thailand
              What benefits does Coca
               Cola bring to the
               economy of Thailand?
               – Employment: The company
                 employs 9,000 people.
               – Investment: It operates
                 seven bottling facilities
                 including a state-of-the-art
               – Knowledge and skills
                 transfer: It has two
                 licensed bottling partners in
Drawbacks of multinationals on
      host economies
   These include:
     –   leakages from the economy
     –   prices and bargaining power
     –   exporting of externalities
     –   threat to local competition
     –   power to pull out
     –   enclaves and dual development
     –   resource grabbing
     –   labour exploitation
McDonald’s in Thailand
              What are the possible
               drawbacks of
               McDonald’s for its
               host country?
               – Competitive threat to
                 local firms
               – leakages from the
               – lack of sensitivity to
                 host culture
The End

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