International Financial System - International financial environment, International Business Video Lecture | International Business - B Com

chapter 14 deals with the international
financial system and the basis of trade
which is comparative advantage however
if you remember back to earlier in the
semester you studied comparative
advantage in Chapter two because of that
we're going to be spending less time on
that topic in more time on the
international financial system a quick
note while comparative advantage is the
basis of trade the international
financial system makes trade possible it
would be hard for countries to buy and
sell goods from one another if they were
unable to convert their currency from
their domestic currency to the domestic
currency of the country they are trading
before we begin let's take a minute to
talk about international trade as we
just said a bit earlier international
trade occurs when countries buy and sell
goods and services between here are some
main facts about the US trade in 2012 US
has a trade deficit in goods for
physical products a trade deficit occurs
with imports exceed exports in 2012 a
u.s. the US trade deficit in goods was
735 billion dollars the u.s. however has
a trade surplus in services a surplus
occurs with exports exceed influence in
2012 the trade surplus in the services
sector was 195 billion dollars if you
add the two figures together total net
exports or the number that gets reported
in GDP was a negative 539 billion
bottles
principle US exports include
chemicals agricultural products like
corn and soybeans consumer durables
semiconductors in aircraft principal US
imports include petroleum automobiles
metals household appliances and
computers
remember the trade deficit will occur
wood imports exceed exports maybe trade
surplus will occur when the opposite
happens when exports EXCI influence now
despite the US trade deficit it happens
to be the second largest exporting
country in the world traveling only of
course China the European Union reports
its exports together because it operates
as a trade zone however its figures are
summation from the individual exports of
its multiple member nations and not one
country as you can see by the figures
calculated by the World Trade
Organization China exports a little over
two trillion dollars in goods and
services on an annual basis the United
States comes in at one point five
children followed by Germany at one
point four trillion as you can see there
are numerous European Union countries in
this chart that also report individually
so looking at these figures
Germany is third however just a few
years ago Germany was this world's
largest exporting nation with the United
States second they were leapfrog and the
United States is leapfrog by China
within the last Williams
despite what people think though Canada
and not China is the USS largest
straight important that seems to make
sense since Canada is a neighbor country
bordering the u.s. to the door and with
the development of the North American
Free Trade Agreement which we'll talk
about a little bit later the barriers to
trade between the two countries have
been significantly reduced meaning it's
a lot easier both regulatory and
logistically to trade with Canada than
it is and the other countries as we
initially discussed in Chapter two
specialization and trade increase the
productivity of the country's resources
and will allow for greater total output
and income specialization results in
more efficient production and because of
scarcity we have a responsibility to be
as efficient as possible with all
resources comparative advantage allows
us to determine who should produce oil
if you may recall comparative advantage
is a lower relative or comparative
opportunity cost than that of another
person producer for country the terms of
trade for the rate at which units of one
product can be exchanged from units of
another product can make both countries
that are on and they can make both
countries better off by allowing them to
specialize or concentrate their
resources on what they do best which
will ultimately lead to a surplus of
production for which they could trade or
other items or services that they need
but for which they would produce have a
lower opportunity cost thus producing
them
less efficient because importers and
exporters commonly use different
currencies it is critical that one or
both of them can convert the domestic
currency into the foreign currency to
facilitate trade without that ability
there would be no trade or trade would
be very difficult
meaning all countries would be worse off
without an international financial
system without that international
financial system trade would be very
difficult
specifically a foreign exchange market
is the component of the international
financial system where foreign
currencies are exchanged and relative
currency places are established in
exchange rate for the rate at which one
country trades one country's currency
trades for another is determined within
the foreign exchange market buyers and
sellers interacting in international
markets will exchange their currencies
and the intersection between the supply
and the demand graphs for the supply and
demand schedules for currencies will
develop an equilibrium point or market
price or exchange exchange rates though
they need to be fixed or floating if a
country pegs its currency to the US
dollar meaning that its currency is
equal to a set amount of US Dollars and
does not fluctuate in the foreign
exchange market then it is said to have
a fixed exchange rate if the country
relies on the florid exchange market
to determine determine its exchange rate
it is said to have a floating exchange
rate and as we said earlier the
intersection of the supply and demand
curves will determine a floating
exchange rate of one currency versus
another so let's take a look at an
example of the market for foreign
currency for British pounds as you can
see the intersection of the demand for
pounds curve d1 and the supply per pound
curve s1 determines the equilibrium of
market dollar price for pounds here in
this example that is two American
dollars so this example upset
how many US how many US dollars is
required for one British pound
looking at the graph you can see that
the exchange rate in dollars per pound
it's two US dollars to one British pound
the upward
arrow demonstrated here is a reminder
that a higher dollar price of homes
let's say three dollars per pound caused
by either a shift in the demand or the
supply curve means that the dollar has
depreciated versus the British Pound and
that the count has appreciated versus
the US dollar the downward arrow tells
us that at a lower dollar price of
Penance let's just say one dollar per
pound again cause my shifts in either
the supply or the Dominica's means that
the dollar has appreciated and the pound
has depreciated against one of the
depreciation is a decrease in the value
of a currency relative to another
currency for example it will now take
more US dollars to acquire one British
Penniman meaning that it will cost more
money to visit Britain to buy property
in Britain or to shop in Britain
appreciation is an increase in the value
of a currency relative to one or
relative to another country for example
it'll take less US dollars to acquire
abridgement in this situation it will
cost less American dollars to buy
property in Britain to shop in Britain
or to travel to Britain on a more
current impractical note in recent years
there have been complaints that China
has purposely devalued its currency for
the sole purpose of increasing its
exports they are doing this through
expansion of their domestic money supply
on the exchange rate for the Chinese
currency known as the yuan is reduced
it makes Chinese made products cheaper
to farm purchases
in doing so China can ensure that its
factories keep producing thus ensuring
continued economic growth think circular
flow model this policy does have its
disadvantage mainly the increase in the
production or printing of the yuan will
make domestic consumption more expensive
I will have a separate video posted
analysing the effects of a devaluation
and appreciation of the currency and how
it affects export import prices now you
said that the intersection of the supply
and demand curves determine the exchange
rate what are some of the factors that
can cause a country's currency to
appreciate or depreciate from the demand
side its tastes do we want to go to this
country do we want products from this
country relative income and relative
price levels interest rate policies and
speculation speculation is the buying
and selling of currencies or profit and
not for the utility of those currencies
additionally an increase or decrease in
the money supply by either
contractionary or expansionary monetary
policy will either increase or decrease
the supply of councils or funds the
increase of supply in funds will in fact
depreciate a country's foreign exchange
rate in the floating rate system
most countries enter into international
trade agreements and form trade bloc's
by doing so it allows them to minimize
or even eliminate in some cases the
barriers to trading with another country
these barriers include regulatory issues
or regulatory laws such as quotas which
is a limit on the amount of goods one
country can import in a certain sector
and tariffs for taxes on from the
earliest trade agreement was the general
agreement on tariffs and trade known as
the gap formed in 1947 just after the
end of World War two this agreement was
formed by 23 nations who agreed to get
equal treatment to one another they
reduced tariffs through mutual or
multinational negotiations and
eliminated those nasty import quotas in
more recent times the WTO or World Trade
Organization was formed in 1993
it included 152 nations as of 2008 the
WTO oversees the provisions of the
current world trade agreement resolves
disputes that stem from it and holds
rounds of trade negotiations the WTO
attempts to make trade easier within its
member nations one downfall that the WTO
has is that it may have some level of
dispute resolution power it does not
have a level of police town meaning
there's a dispute between two trading
partners the wtl can determine whether
it's whether or not it's legal but they
cannot enforce the trade agreement other
commonly known trade agreements and
trade bloc's include European Union the
EU is a trade bloc that included 27
European nations as of 2018 the EU
eliminated tariffs and quotas amongst
its members established comment hours
for imported goods from outside the
member nations reduce barriers to the
free movement of capital and coordinated
another economic policies it also led to
the creation of a single European
currency on European Union currency
known as the yo closer to home the North
American Free Trade Agreement or NAFTA
was formed in 1993 and as a print and it
is a free trade zone that includes the
United States Canada and Mexico as
mentioned earlier when talking about the
u.s. s largest trading partners NAFTA
allows from large amounts of goods to
move across the borders at relatively
lower prices this means that the u.s.
now has an incentive to trade with
Canada and to trade with Mexico this has
led however to some drawbacks in some US
industries specifically in the US auto
industry many factories that were once
located inside the United States have
now relocated to Canada or to Mexico and
even though these areas may have
stricter regulatory laws in some areas
the elimination of the tariffs of moving
these finished products across borders
has made it cheaper for the auto
manufacturers to make their vehicles in
these countries as opposed to the United
States when people protest against the
creation of these trade agreements it is
because they feel that jobs will be lost
domestically and be shipped
to other countries in some instances
that is a valid point
however because of comparative advantage
and because of scarcity a country needs
to be efficient with its resources if it
cannot produce efficiently it is better
off concentrating in those areas that it
can do efficiently in the u.s. each case
they can innovate and they are much
better at innovation than they are at
production because of the expense
associated with it
NAFTA has allowed companies to
concentrate on innovation and offshore
what they do it efficiently in hopes of
making the final product as fast and as
affordable to consumers as can be this
concludes our look at International
trade and international financial system
as I mentioned there will be a separate
video lecture posted on the practical
business implications implications
employed on changes in a foreign
currency on import and export places