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Laissez-Faire versus Interventionist Approaches
to Exports & Imports
Barter
Interventionist:
Mercantilism
Neomercantilism
Free-trade theories:
Absolute advantage Comparative advantage
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Theories of Trade Patterns
Explaining trade patterns:
Country size
Factor proportions Country similarity
Trade competitiveness:
Product life cycle theory
Porter diamond
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Mercantilist Theory
y Mercantilist theory proposed that a country
should try to achieve a favorable balance of
trade (export more than it imports)
y Neomercantilist policy also seeks a favorable
balance of trade, but its purpose is to achieve
some social or political objective
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Mercantilist Theory
MERCANTILISM
Trade Theory Formed During 1500 to 1800 AD
Countries to Have More Exports Than Imports
Countrys Wealth Depends On Its Holdings ofTreasure - Gold
Dependence on Raw Material Rather ThanManufactured Goods
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Mercantilist Theory
MERCANTILISM
Government Established Monopolies OverCountrys Trade
Restricted Imports Mercantilism Helped Colonial Powers, Colonies
ere Not Manufactures and Imported ValueAdded Goods
This Was Cause of American Revolution
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TRADE THEORIES
THEORY OF ABSOLUTE ADVANTAGEAdam Smith in 1776 developed theory of
absolute advantage
Highlighting that countrys wealth is basedon its available goods and services
Some countries produce goods more
efficiently than other countries
This is good for free trade
If consumer gets choice of cheaper product,
why buy expensive domestic product?DR.MANOHAR PANDIT
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TRADE THEORIESTHEORY OF ABSOLUTE ADVANTAGE
If trade was unrestricted then each countrywill produce only those goods where theyhave competitive advantage
Specialisation increase countrys efficiency Labour more skilled by repeating same task
No changeover time, more skills
Long production runs, efficient productionMarketplace would determine what countryshould produce,
Is the advantage natural or acquired?
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TRADE THEORIES
Natural advantage
Climate, natural resources and human
resources availability
Most countries import natural resourcesfrom other countries whose resources are
plentiful
USA cannot grow tea and Sri Lanka cannotgrow wheat
Variation among countries in natural
advantages helps in international tradeDR.MANOHAR PANDIT
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TRADE THEORIES
Acquired advantage
Countries that produce manufacturedgoods and services competitively have
acquired advantageMost of the world trade is of manufactured goods and services
Japan exports steel
Denmark exports silverware
Technology changes alter relativepositions of the countries due to new
usage, substitutesDR.MANOHAR PANDIT
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TRADE THEORIES
COMPARATIVE ADVANTAGE DAVID RICORDO
Countries With Absolute Advantage Should Give up Less
Efficient Output To Produce More Efficient Output
CostCost ComparisionComparision
Labour Cost of Production in Hours
1 unit of Wine 1 unit of Cloth
Portugal 80 90
England 120 100
Opportunity CostOpportunity Cost
Wine Cloth
Portugal 80/90=8/9 90/80=9/8
England 120/100=12/10 100/120=10/12
Country has Comparative Advantage if Opportunity Cost is
lower to produce at home than in foreign country
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TRADE THEORIESCOMPARATIVE ADVANTAGE
Eng - Cost of 1 unit of Wine = 1.2 units of Cloth
Port - Cost of 1 unit of Wine = 0.89 units of Cloth
England will gain to Import 1 unit of Wine at less
than 1.2 units of Cloth. England to export cloth andimport Wine
Portugal will gain to Import more than 0.89 units of
Cloth for 1 unit of Wine. Portugal to import cloth
and export WineSaving of labour hours can help country to produce
more, England should give up production of Wine
and use labour for production of Cloth
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Theory of Comparative Advantage
Through specialization and free trade total
global output can increase even if one country
has an absolute advantage in the production
of all products
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Resources required to produce 1 ton of Cocoa and Rice
Cocoa Rice
Ghana 10 20
South Korea 40 10
Production and Consumption without Trade
Cocoa Rice
Ghana 10.0 5.0
South Korea 2.5 10.0
Total Production 12.5 15.0
Production with Specialisation
Cocoa Rice
Ghana 20.0 0.0
South Korea 0.0 20.0
Total Production 20.0 20.0
Consumption after Ghana trades 6 tons of Cocoa for 6 tons of rice from South Korea
Ghana 14.0 6.0
South Korea 6.0 14.0
Total Production
Increase in Consumption as a result of specialisation and trade
Ghana 4.0 1.0
South Korea 3.5 4.0
Gain from the Trade
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Theories of Specialization
Both absolute and comparative advantagetheories are based on specialization
Assumptions policymakers question:
full employment economic efficiency
division of gains
transport costs services
production networks
mobility
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Factor Endowment
(Hecksher-Ohlin) Theory
A nation will export the goods whose production
requires intensive use of the nations relatively
abundant and cheap factors and import the
goods whose production requires intensive use
of its scarce and expensive factors.
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Trade Pattern Theories
How much a country will depend on
trade if it follows a free trade policy
What types of products countries will
export and import
With which partners countries will
primarily trade
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Theory Of Country Size
Countries with large land areas are apt tohave varied climates and variety of natural resources
They are generally more self-sufficientthan smaller countries are due to size ofeconomy and production scale
Large countries production and marketcenters are more likely to be located at agreater distance from other countries,raising the transport costs of foreign trade
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Factor-Proportions Theory
Country Classifications Factor Conditions / Production Factors
Physical Resources
Human Recourses
Knowledge Resources
Capital Resources
Infrastructure
Demand Conditions Composition of Home Demand
Size and Growth Pattern of Home Demand
Internationalisation of DemandDR.MANOHAR PANDIT
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Factor-Proportions Theory A countrys relative endowments of land,
labor, and capital will determine the relativecosts of these factors
Factor costs will determine which goods thecountry can produce most efficiently
Land Labour Relationship Hon Kong CanHave Garment Factories But Cannot ProduceYarn / Cotton
Labour Capital Relationship Low
Investment Cheap Labour Carpets from Iran,Afghanistan
Technological Complexities Mechanisationof Wheat Farm In Canada and Cheap FarmLabour in India
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Country-similarity Theory
Most trade today occurs among high-incomecountries because they share similar market
segments and because they produce and
consume so much more than emerging
economies - Economic similarity Much of the pattern of two-way trading partners
may be explained by cultural similarity between
the countries, political and economic agreements,
and by the distance between them - LocationSimilarity, Cultural Similarity
Independence Interdependence Dependence
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Product Life Cycle (PLC) Theory
All Phases of PLC Affects Production
Location, Market Location, Competitive
Factors and Production Technology
Companies will manufacture products first inthe countries in which they were researched
and developed, almost always developed
countries
Over the products life cycle, production will
shift to foreign locations, especially to
developing economies as the product
reaches the stages of maturity and declineDR.MANOHAR PANDIT
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TRADE THEORIES
IPLC THEORYIPLC THEORY
Advance Nations Becomes Victim of
Its Own InnovationStage 0 Local Innovation
Stage 1 Overseas Innovation
Stage 2 MaturityStage 3 Worldwide Imitation
Stage 4 Reversal
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TRADE THEORIES
PLC THEORYPLC THEORY
Validity of PLC
Leather Goods
Wholesale BankingApparel
Transportation Equipment
Electronic and ElectronicPrimary Metals
Instruments
Non-electrical MachineryDR.MANOHAR PANDIT
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TRADE THEORIES
PLC THEORYPLC THEORY
01
2
3
Time
Export
Import USA
Adv NationsLDCs
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The Porter Diamond
Four conditions as important for competitive
superiority:
demand conditions factor conditions
related and supporting industries
firm strategy, structure, and rivalry
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Limitations of the Porter Diamond Theory
Production factors and finished goods
are only partially mobile internationally
The cost and feasibility of transferring
production factors rather than
exporting finished goods internationally
will determine which alternative is
better
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The Relationship
between Trade and Factor Mobility
Capital and labor move internationally
to gain more income and flee adverse
political situations
Although international mobility of
production factors may be a substitute
for trade, the mobility may stimulate
trade through sales of components,equipment, and complementary
products
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REGIONAL TRADE BLOCKS
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REGIONAL TRADE BLOCKS
REGIONAL INTEGRATION
Agreement between the countries in ageographical region to reduce and ultimatelyremove all tariff and non-tariff barriers to thefree flow of goods, services and factors ofproduction between each other
WTO members to notify WTO about participation
1948 -1994 124 notifications to GATT
After 1995 130 notifications to WTO
Till date 170 are in force
Planned 300 agreements if materialised
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REGIONAL TRADE BLOCKS
REGIONAL INTEGRATION
Impediments to Integrations
Shift of manufacturing in NAFTA from Canadaand US to Mexico
Loss of control over Monetary, Fiscal and Tradepolicies
High cost producers replaced by low costproducers from the region Trade creation
High cost producers are replaced by low costproducers from outside region Trade diversion
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REGIONAL TRADE BLOCKS
REGIONAL INTEGRATION
Free Trade Area
No Barriers To Trade of Goods and ServicesAmong Member Countries
No Discrimination of Quota, Tariff, SubsidiesAmong Member Countries
Member Countries Can Decide Own Policies forNon-member Countries
Variable Tariffs By Each Member Country OnSame Products Imported From Non-member
Countries
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REGIONAL TRADE BLOCKS
REGIONAL INTEGRATION
Customs Union
Step Towards Economic and Political Integration
No Barriers To Trade of Goods and Services
Among Member Countries
Common External Trade Policy Among MemberCountries
Administrative Mechanism To Oversee Trade
Relations With Non-members
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REGIONAL TRADE BLOCKS
REGIONAL INTEGRATION
Common Market
Similar To Customs Union
No Barriers To Trade of Goods and ServicesAmong Common and Same External Trade Policy
Free Movement of Factors Like Labour andCapital
No Restrictions on Immigration and CapitalMovements
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REGIONAL TRADE BLOCKS
REGIONAL INTEGRATIONEconomicUnions
Closer Economic Integration and CooperationThan Common Market No Barriers To Trade of Goods and Services
Among Members and Same External Trade Policyand Free Movement of Factors Like Labour and
Capital Common Currency, Hormonisation of Tax Rates
and Common Fiscal & Monetary Policy. A StepTowards Political Union
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REGIONAL TRADE BLOCKS
NAFTA
January 1994
USA, Canada, Mexico Worlds Largest Free Trade Area
Increased Trade and Investments
Tariff and Non-tariff Elimination Will Include South American Countries
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REGIONAL TRADE BLOCKS
NAFTA
Pact to Eliminate Barriers for 10,000
Products for Trade Between MemberCountries
Pact to Benefit Over 380 million Consumers
Implementation Over a Period of 15 Years
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REGIONAL TRADE BLOCKS
NAFTA
India and NAFTA Countries
USA Largest Business Partner of India
India Preferred Destination for Auto Parts
Canada Imports Electronics and Software
Mexico Focused Destination, Fastest GrowingCountry
Proximity to Latin America and Member ofNAFTA
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REGIONAL TRADE BLOCKS
NAFTA
NAFTA & WTO
Regionalisation May Harm WTO
Regionalisation Has Helped Mexico
There are No Indications That Regionalisation is
Harmful For Economic Growth NAFTA is Complementary To WTO
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REGIONAL TRADE BLOCKS
EUROPEAN UNION
1 January 1993
The single market
the free movement of goods, services, people and
money
More than 200 laws have been agreed since 1986covering tax policy, business regulations,
professional qualifications and other barriers to
open frontiers
The free movement of some services is delayed
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REGIONAL TRADE BLOCKS
EUROPEAN UNION
PowerCenter in GlobalEconomyeffective
Second Largest Economy 26.6% Share to Global GDP, US Share 32.5%,
Japan Share 12.2%
Block of 25 Countries, Population over 500 m
31.1% Share to Merchandise Global Exports, USShare 11.1%
$3300 b Merchandise and $712 b Services in
2004
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REGIONAL TRADE BLOCKS
EUROPEAN UNION
PowerCenter in GlobalEconomy
Major Player in Capital Markets Lending andInvestments
Most Important Source of FDI in the World
48 Out of 100 Largest Assets Are In EU 70% Global M&A Are of EU MNCs
Major Banking Activities in the East
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REGIONAL TRADE BLOCKS
EUROPEAN UNION
Background
Headquarters in Brussels Established on Nov 1, 1993
Started As European Coal & Steel Community in1951
Became European Community in 1967
12 Members Signed Treaty of EU
In 2007 27 Member Countries
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REGIONAL TRADE BLOCKS
EUROPEAN UNION
Presentscenario
24,000 employees
One commissioner from each country
Council of EU takes care interest of memberstates
Court of Justice single judge from eachcountry, independent officials
Establishment of Euro 01.01.1999 / 2002
16 out of 27 members have Euro
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Three key players
The European Parliament- voice of the peopleJerzy Buzek, President of
of the European Parliament
The council of Ministers- voice of the Member StatesHerman Van Rompuy, President of the European Council
The European Commission- promoting the common interestJos Manuel Barroso, Presidentof the European Commission
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REGIONAL TRADE BLOCKS
EUROPEAN UNION
India andEU
India recognised EU in 1962 EU is Largest Trading Partner and Source of FDI
India is EUs 17th Largest Supplier and 20th Largest
Export Destination, in Value Terms High Import Duty in India
High Standards, a Barrier for Indian Exporters
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REGIONAL TRADE BLOCKS
EUROPEAN UNION
India andEU Bilateral Agreements
Agreement on SugarcaneExports to EU, at Guaranteed Price
Administrative Agreement on Textile Trade
Management of Quotas and Reduction in Tariff
Cooperation Agreement
Agreement on Trade, Economic Cooperation,Environment, Agriculture, Tourism, IPR
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REGIONAL TRADE BLOCKS
EUROPEAN UNION
India andEU Bilateral Agreements
Science and Technology AgreementCovers Health, Agriculture and Natural Resources
Allows Access to Indian Researchers to EUs
Programme of Research and TechnologigyDevelopment
Customs Cooperation Agreement
Simplify Customs Procedures as per Intl. Standards
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REGIONAL TRADE BLOCKS
ASEAN
Formation
August 8, 1967, Signed at Bangkok
Signatories
Thailand
Indonesia
Malaysia
Singapore
Philippines
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REGIONAL TRADE BLOCKS
ASEAN
Objectives
Accelerate Economic Growth, Social Progress andCultural Development
Spirit of Equality and Partnership for Prosperity
in The Region Promote Peace and Stability, Respect to Other
Nations as per Charter of UN
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REGIONAL TRADE BLOCKS
ASEAN
FundamentalPrinciples
The Treaty of Amity and Cooperation in SE Asia
Signed on February 24, 1976
Mutual Respect for the Independence, Sovereignty,Equality, Territorial Integrity and National Identity of
All Nations The Right of Every State to Lead Its National
Existence Free From External Interference,Subversion or Coercion
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REGIONAL TRADE BLOCKS
ASEAN
FundamentalPrinciples
Non-interference in The Internal Affairs of OtherMember Nations
Peaceful Settlements of Difference or Disputes
Renunciation of The Use of Threats or Force Effective Cooperation Between Themselves
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REGIONAL TRADE BLOCKS
ASEAN
Agreements WithIndia
Signed on October 8, 2003 Agreement to Create Indo ASEAN Free Trade Area
By 2011
Agreement to Counter Terrorism India Becoming Signatory To ASEAN Treaty of Amity
and Cooperation
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REGIONAL TRADE BLOCKS
ASEAN
Trade Opportunities in ASEANCountries
Tourism Open Sky Policy
Indian Film Industry
BPO Other Areas Like Auto Parts, Natural Resources
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REGIONAL TRADE BLOCKS
ANDEAN COMMUNITY
Agreementsigned in 1969
Bolivia, Chile, Ecuador, Colombia, Peru signedAndean Pact
Collapsed in 1980
Political and Economic problems cause for failure 1990 renamed Andean Community, Venezuela
replaced Chile, now it is a custom union
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REGIONAL TRADE BLOCKS
MERCOSUR
Originated in 1988
Argentina and Brazil Moderate reduction in tariff increased business
by 80% over 1980
Paraguay and Uruguay joined in 1990 Population of over 200 m
Roadblock in 1998 as member countries had
recession
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REGIONAL TRADE BLOCKS
CENTRAL AMERICAN COMMON MARKET
Originated in early1960s
Failed attempt Costa Rica, El Salvador, Guatemala, Honduras,
and Nicaragua
War between Honduras and El Salvador oversoccer match
Some progress with US initiative after 2003 for
common market
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REGIONAL TRADE BLOCKS
CARICOM
Established in 1973
English speaking community of Caribbeancountries
Planned operation of customs union in 1991
Failed repeatedly on creation of economicintegration
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INTERNATIONAL BUSINESSWTOWTO
22,000 page document signed on Jan 1st, 1995 by 128 countries
WTO Single Institutional frame work encompassing GATT and
results of UR
5 Specific Functions
Facilitate implementation, administration & operation, and further
the objectives of Multilateral Trade Agreement and
Provide framework for implementation, administration & operation
of Plurilateral Trade Agreements
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INTERNATIONAL BUSINESSWTO
Provide forum for negotiations among members concerning their
multilateral trade relations
Administer understanding on Rules and Procedures governing
settlements of disputes
Administer trade review mechanism
Cooperate with IMF and other bodies for achieving greater
coherence in Global Economic Policy making
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INTERNATIONAL BUSINESSWTO
4 Main Functions
Supervise on regular basis operations related to declarations
related to Goods, Services, TRIPS
Act as dispute settlement body
To serve as Trade Review Mechanism
Establish Goods Council, Services Council and TRIPS Council as
subsidiary bodies
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INTERNATIONAL BUSINESSWTOWTO
Three BasicIssues Taken up byUR
Reducing specific trade barriers and improving market access
Strengthening GATT principles
TRIPs (Trade Related Intellectual Property Rights)TRIMs (Trade Related Investment Measures)
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INTERNATIONAL BUSINESS
IMFIMF
BrettonBretton Woods Conference, 1945Woods Conference, 1945 ITO, WorldITO, World
Bank, IMFBank, IMF
Unstable currencies & inadequate monetaryUnstable currencies & inadequate monetary
reserves could not develop & function worldreserves could not develop & function world
marketsmarkets
01.03.194701.03.1947 IMF FunctioningIMF Functioning
29 Signatories to29 Signatories to startwithstartwith, 184 by 2002 end, 184 by 2002 end
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INTERNATIONAL BUSINESS
IMFIMF -- Major ObjectivesMajor Objectives
To Promote International MonetaryTo Promote International MonetaryCooperationCooperation
To Facilitate Expansion and Balanced GrowthTo Facilitate Expansion and Balanced Growthof International Tradeof International Trade
To Promote Exchange Rate StabilityTo Promote Exchange Rate Stability
To Establish Multilateral System of paymentTo Establish Multilateral System of payment
To Make Its Resources Available to ItsTo Make Its Resources Available to ItsMembers Who Are Experiencing Balance ofMembers Who Are Experiencing Balance ofPayment DifficultiesPayment Difficulties
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INTERNATIONAL BUSINESSIMFIMF
BrettonBretton Woods Agreement Established FixedWoods Agreement Established FixedExchange Rates for Each Member CountryExchange Rates for Each Member Country
USD 35 = Gold 1 Oz. par Value was sameUSD 35 = Gold 1 Oz. par Value was samewhether Gold or USD was usedwhether Gold or USD was used
Variation of 1% allowed, raised to 2.25% InVariation of 1% allowed, raised to 2.25% In19711971
US had 70% of Worlds Gold Reserve in 1947US had 70% of Worlds Gold Reserve in 1947
Redemption of Dollar in GoldRedemption of Dollar in Gold
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INTERNATIONAL BUSINESS
IMFIMF
Member Countries Contribute to IMFMember Countries Contribute to IMF -- QuotaQuota
Quota Depends Upon National Income, MonetaryQuota Depends Upon National Income, Monetary
Reserves, Trade Balance and Other EconomicReserves, Trade Balance and Other Economic
IndicatorsIndicators
Quota is Pool of Money IMF can Lend to MemberQuota is Pool of Money IMF can Lend to Member
Countries, Basis of How Much Country Can BorrowCountries, Basis of How Much Country Can Borrowas Allocation of SDRas Allocation of SDR
Quota determines Voting RightsQuota determines Voting Rights
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INTERNATIONAL BUSINESS
IMFIMF
Total SDRTotal SDR -- 213 million213 million
Largest Quota USA 17.5%, Japan 6.6%,GermanyLargest Quota USA 17.5%, Japan 6.6%,Germany6.11%, France and UK 5.05% each6.11%, France and UK 5.05% each
Board of Governors is Final AuthorityBoard of Governors is Final Authority
Day to Day Business with 24 Executive DirectorsDay to Day Business with 24 Executive Directors
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INTERNATIONAL BUSINESS
IMFIMF
SDRSDR
Created in 1969Created in 1969
SDR 213 = $ 280 billionSDR 213 = $ 280 billion
SDR is weighted average of USD (45%), Euro (29%),SDR is weighted average of USD (45%), Euro (29%),
JPY (15%), GBP (11%) by end 2002JPY (15%), GBP (11%) by end 2002
SDR designed to take over GoldSDR designed to take over Gold
Several Countries Have SDR Base for Value for TheirSeveral Countries Have SDR Base for Value for Their
CurrenciesCurrencies
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INTERNATIONAL BUSINESS
IMFIMFThe currency value of the SDR is determined by
summing the values in U.S. dollars, based on market
exchange rates, of a basket of major currencies (theU.S. dollar, Euro, Japanese yen, and pound sterling).
The SDR currency value is calculated daily (except
on IMF holiday or whenever the IMF is closed for
business) and the valuation basket is reviewed and
adjusted every five years.
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INTERNATIONAL BUSINESS
IMFIMFFriday, September 03, 2010
Currency Currency amount under
Rule O-1
Exchange rate 1 USD eq
% change in Ex rate against
USD from previous
calculation
Euro 0.4100 1.28410 0.526481 0.156
Japanese Yen18.4000 84.51000 0.217726 -0.379
Pound Sterling 0.0903 1.54000 0.139062 0.006
USD 0.6320 1.00000 0.632000
1.515269
U.S.$1.00 = SDR 0.659949 2
SDR1 = US$ 1.51527 4
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INTERNATIONAL BUSINESS
IMFIMF
SDRSDR
Created in 1969Created in 1969
SDR 213 = $ 280 billionSDR 213 = $ 280 billion
SDR is weighted average of USD (45%), Euro (29%),SDR is weighted average of USD (45%), Euro (29%),
JPY (15%), GBP (11%) by end 2002JPY (15%), GBP (11%) by end 2002
SDR designed to take over GoldSDR designed to take over Gold
Several Countries Have SDR Base for Value for TheirSeveral Countries Have SDR Base for Value for Their
CurrenciesCurrencies
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INTERNATIONAL BUSINESSWORLD BANKWORLD BANK
Lending Money to the governments of developingLending Money to the governments of developing
countries to finance development projects in education,countries to finance development projects in education,
health and infrastructurehealth and infrastructure Providing assistance to governments for developmentalProviding assistance to governments for developmental
projects to the poorest developing countriesprojects to the poorest developing countries
Lending directly to private sector to help strengthen theLending directly to private sector to help strengthen the
private sector in developing countries with longprivate sector in developing countries with long--termtermloans equity investments and other financial assistanceloans equity investments and other financial assistance
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INTERNATIONAL BUSINESSWORLD BANKWORLD BANK
ProvidingProviding investorsinvestors withwith investmentinvestment guaranteesguarantees
againstagainst nonnon--commercialcommercial risks,risks, toto createcreate anan
environmentenvironment inin developingdeveloping countriescountries toto attractattract foreignforeigninvestmentsinvestments
PromotingPromoting increasedincreased flowflow ofof internationalinternational investmentsinvestments
byby providingproviding facilitiesfacilities forfor conciliationconciliation andand arbitrationarbitration
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