...Chapter1 2. a. How does foreign competition limit the prices that domestic company and the wages and benefits that workers can demand? Answer: More foreign companies in the country means more options customers could choose. If the domestic companies increased their prices of produce, the local customers will find another similar products instead. Foreign competition also acts to limit the wages and benefits that workers can demand, because build a company overseas, company have to spend more money than local companies, if workers demand more wages and benefits, the costs for products will increased for sure. As for the domestic companies, the same problem they are facing. On the other situation, if local company agree to pay more money to their workers but the foreign companies do not, they must transfer this part of cost to their products, therefore, they will lose their strength of their price. b. What political solutions can help companies and unions avoid the limitations imposed by foreign competition? Answer: One of the solutions is protectionism, the government came out some polices by limiting foreign competition, such as increasing their tax. In the meanwhile, the government also protects their local companies, such as decreasing tax and gives them lower fee using imports to produce their own goods and services for sale. c. Who pays for these political solutions? Explain. Answer: Government need to use tax to pay the services...
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...hundred yuan; one, two and fivejiao; and one, two and five fen. The current official exchange rate between U.S. dollar and Renminbi yuan is about 1:6.8 (1 US dollar = 6.8 yuan RMB). Since the economic reform started in 1979, the Chinese currency (yuan) had been devalued several times until 1994 when the two-tier foreign exchange system was ended. While the official rate of yuan had been maintained constant over seven years since 1998, the pressure on the revaluation of yuan intensified. It has been perceived by some economists that the yuan is undervalued on an order of 37.5%. There are two implications for a currency devaluation. First, devaluation makes a country's exports relatively less expensive for foreigners and second, it makes foreign products relatively more expensive for domestic consumers, discouraging imports. As a result, this may help to reduce a country's trade deficit. Thus, As China pursued its gradual transition from central planning to a free market economy, and increased its participation in foreign trade, the renminbi was devalued to increase the competitiveness of Chinese industry. What happened? For most of its early history, the RMB was pegged to the U.S. dollar at 2.46 yuan per USD (note: during the 1970s, it was appreciated until it reached 1.50 yuan per USD in 1980). When China's economy gradually opened in the 1980s, the RMB was devalued in order to improve the competitiveness of Chinese exports. Thus, the official RMB/USD exchange rate declined...
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...Problems of Chinese Economic Growth? Since 1978 the Chinese economy has maintained economic growth at an average of nearly 8%. By western standards this is remarkable. The UK, by contrast, has grown at an average rate of 2.5%. However, despite the impressive figures there are many serious economic problems resulting from economic growth. In particular, the growth rate combined with a population of over 1 billion has caused serious environmental problems. These are a good example of negative externalities of growth. A negative externality is a cost imposed on the rest of society as a result of receiving the benefits from growth. Problems of Chinese Economic Growth. 1.Pollution. Pollution is a major problem in many industrialised cities. Increased car ownership has led to problems of smog and worsening air quality. Pollution also occurs from China’s vast industrial sector. Often regulation of pollution is very limited with untreated sewage often been poured directly into rivers. 2. Shortage of Power. The growing demand of the Chinese economy has placed great demands on China’s creaking power infrastructure. This has led to the creation of projects like the Three Gorges Dam. This has been criticised for creating environmental and social problems. Environmentalists fear that the dam will severely impact on the natural habitats of many species. 3. Growing Income Inequality China’s economic growth has benefited the south and eastern regions more than anywhere...
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...BFS69 16 Aug, 2013 Weekly th www.learnwithflip.com BFS Roundup @ FLIP Updates @ FLIP More than a thousand Bschoolers (from 60+ premier b-schools) have already enrolled for the FLIP National Challenge, a fiercely fought all India contest ; where B Schoolers write select FLIP Certifications, to benchmark themselves, against their peers. An All India Ranking will be given to the top 50 scorers. Besides a strong Campus placement edge, the contest also offers off campus placement benefits to the top 10 scorers. This includes PPIs, Internships, Career Talks, Mock Interviews, and Resume Counseling etc. to “Power Your Placements” Click here to attempt live interview simulations in the areas of capital markets, corporate banking, finance and banking (summers), to check your preparedness for placements Click here to see the complete details of the contest. FLIP - setting a BFS knowledge benchmark. CAD Jitters: Customs duty on gold, platinum and silver raised to 10% The government increased Customs duty on gold, platinum and silver to 10 per cent, in a move aimed at curbing the imports of these precious metals to limit its current account deficit. Jewellers criticized the move the saying that this will encourage gold smuggling and increase the prices. FLIP’s View: These imports contribute a whopping 61% of the CAD. That is the concern. With the festival season coming up, one will need to track how price sensitive this market is, in India. The week that was…. US says BofA lied...
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...Financial Markets & Institutions Group Assignment Yuan Devaluation Group 2 Group Members Kouadio Dieudonne XPGDM-18 Rohit Khandelwal XPGDM-28 Shruti Tibrewal XPGDM-32 COUNTRY AT A GLANCE Population | 1.364 billion | 2014 | GDP | $10.35 trillion | 2014 | GDP growth | 7.3% | 2014 | Inflation | 2.0% | 2014 | CHINA Economic Overview The Chinese economy experienced astonishing growth in the last few decades that catapulted the country to become the world's second largest economy. In 1978—when China started the program of economic reforms—the country ranked ninth in nominal gross domestic product (GDP) with USD 214 billion; 35 years later it jumped up to second place with a nominal GDP of USD 9.2 trillion. Since the introduction of the economic reforms in 1978, China has become the world’s manufacturing hub, where the secondary sector (comprising industry and construction) represented the largest share of GDP. However, in recent years, China’s modernization propelled the tertiary sector and, in 2013, it became the largest category of GDP with a share of 46.1%, while the secondary sector still accounted for a sizeable 45.0% of the country’s total output. Meanwhile, the primary sector’s weight in GDP has shrunk dramatically since the country opened to the world. China weathered the global economic crisis better than most other countries. In November 2008, the State Council unveiled a CNY 4.0 trillion (USD 585 billion) stimulus package in an...
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...Kingdom of its triple-A credit rating” (Walter, 2013); UK has had its credit rating downgraded from AAA to AA1, with a stable outlook and blame weak medium-term prospects for Britain’s economy over the coming years, predicting economic weakness will weigh on public finances for years to come. Therefore, there are serious implications for business in UK. The purpose of this report is to demonstrate that Britain losing triple-A rating, pound sterling becoming devalued and its effect on business. This report aimed to demonstrate what the impact will be on company, what other companies are doing and the ethics of this. Main Body The U.K. economy early dropped and affected by the financial crisis, and it has had substantial trouble recovering. “Many economists believe a ‘triple-dip’ recession is in the offing and Moody’s implied that ‘slowly grows’ is undertaking the second half of the decade” (Walter, 2013). The bad news caused the pound to decline by almost a cent against the euro and one-and-a-half cents against the dollar today, “as it became clear the ailing manufacturing sector is likely to act as a drag on the UK’s economic growth in the first quarter of 2013” (The Week, 2013). And this big risk decline confidence of UK which could lead to a further weakening in sterling. That’s good news for exporters, but means imports will get more expensive. So, it is possibility that importer will rise prices, which in turn inflation is likely to increase as a result of the weak currency...
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...SOLUTIONS TO CHAPTER 4 PROBLEMS 1. From base price levels of 100 in 1987, West German and U.S. price levels in 1988 stood at 102 and 106, respectively. If the 1987 $/DM exchange rate was $0.54, what should the exchange rate be in 1988? In fact, the exchange rate in 1988 was DM 1 = $0.56. What might account for the discrepancy? (Price levels were measured using the consumer price index.) Answer. If e1981 is the dollar value of the German mark in 1988, then according to purchasing power parity e1988/.54 = 106/102 or e1988 = $.5612. The discrepancy between the predicted rate of $.5612 and the actual rate of $.56 is insignificant and hence needs no explaining. Historically, however, discrepancies betweenthe PPP rate and the actual rate have frequently occurred. These discrepancies could be due to mismeasurement of the relevant price indices. Estimates based on narrower price indices reflecting only traded goods prices would probably be closer to the mark, so to speak. Alternatively, it could be due to a switch in investors' preferences from dollar to non-dollar assets. 3. In early 1996, the short-term interest rate in France was 3.7%, and forecast French inflation was 1.8%. At the same time, the short-term German interest rate was 2.6% and forecast German inflation was 1.6%. a. Based on these figures, what were the real interest rates in France and Germany? Answer. The French real interest rate was 1.037/1.018 - 1 = 1.87%. The corresponding real rate in Germany was...
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...Questions: 1. How did the fixed exchange rate against the dollar that Argentina adopted in the 1990s benefit the economy? By adopting a fixed exchange rate, the government reduced uncertainties for all economic agents in the country. As businesses had the perfect knowledge that prices are fixed and therefore not going to change, hence they could plan ahead in their productions. This also helps the government maintain low inflation, which in the long run should keep interest rates down and stimulate increased trade and investment. 2. Why was Argentina unable to maintain its fixed exchange rate regime? What does this tell you about the limitations of a fixed exchange rate regime? Argentina was unable to maintain its fixed exchange rate regime because the decline in the world economic growth slumped the demand for there commodities. This was largely to the fact that as the peso was pegged to the dollar, and many countries devalued there currency to the dollar due to the economic slump, the Argentinean goods became more expensive, hence reducing there demand. For a country to peg its currency to another it has to maintain balance of trade (import/export) and if they start going into a trade deficit a fixed interest rate regime will not allow for the currency to free flow back into place. Basically a trade deficit will increase demand for the foreign currency (in this case US dollar) and eventually make the dollar expense to buy which will eventually reduce the trade deficit...
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...India’s Macroeconomics. The depreciation of rupee against the dollar is not a recent phenomenon. If we see the valuation of rupee over the past six decades, i.e., post-independence, we can see a continuous downward trend. Though there have been temporary fluctuations in the value, the general trend has been negative. To find the root cause of this phenomenon we need to go 200 years back. Prior to the 18th century most of the economies around the world followed the Silver standard. But then these economies switched to the gold standard, due to the devaluation of Silver as the supply of Silver increased due to increased mining activities. But the British rulers of India did not allow the Indian currency to switch to the gold standard. This resulted in a structural weakness of the currency, which we can still feel to this day. Another landmark episode in the depreciation of the rupee was the 1991 liberalization reforms. Post the reforms the rupee was devalued and allowed to float against the dollar to make Indian exports competitive and shore up more dollars into our reserves. Although we have reaped the benefits of this devaluation for long, the current depreciation is hurting the economy. Now moving on to the recent volatilities in the valuation of rupee, we can see the cause can be attributed to a number of policies and events occurring onshore as well as around the globe. The first would be the strengthening dollar. As the US economy improves, US Treasury bonds yield is increasing...
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...Argentina’s Monetary Crisis In the 1990s Argentina was the darling of the international financial community. The country had fixed the exchange rate for the Argentinean peso to the U.S. dollar at $1 = 1 peso. Maintaining the exchange rate had required Argentina to adopt strict anti-inflationary policies, which had succeeded in bringing down Argentina’s historically high inflation rate and stimulated economic growth. By 2001, however, the economy was running into trouble. Global economic growth slumped and demand for many of the commodities that Argentina exported had fallen in tandem. Argentina’s large neighbor and main trading partner, Brazil, was grappling with a financial crisis of its own and had devalued its currency against the dollar, and thus the peso, effectively pricing many Argentinean goods out of its market. To compound matters, the dollar had appreciated against most major currencies, taking the peso up with it, and making Argentinean goods more expensive in other international markets. Starting in 1999, the Argentinean economy entered into a tailspin that was to take unemployment up to 25 percent by 2002. Anticipating that the country would have to devalue the peso against the dollar, corporations and individuals started to pull money out of pesos, placing their funds in dollar accounts. As people sold pesos, the Argentinean government used its foreign exchange reserves to buy them back in an effort to maintain the exchange rate at $1 = 1 peso. The government quickly...
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...Chapter 5 Exchange Rate Systems questions 1. How can you quantify currency risk in a floating exchange rate system? Answer: To characterize the risk of a currency position, you must try to characterize the conditional distribution of the future exchange rate changes. With floating exchange rates, historical information provides useful information about this distribution. For example, you can use data to measure the average historical dispersion (standard deviation or volatility) of the distribution. The higher this volatility, the riskier are positions in this currency. It is also possible to rely on more forward-looking information using the options markets (see Chapter 20). Finally, we should point out that volatility is an adequate indicator of risk when exchange rate changes are approximately normally distributed. In reality, the distribution of exchange rate changes displays fat tails, even in floating exchange rate systems, and this increases the risk of currency positions. 2. Why might it be hard to quantify currency risk in a target zone system or a pegged exchange rate system? Answer: If the peg or target zone holds for a long time, historical volatility appears to be zero or very limited, but this may not accurately reflect underlying tensions that may ultimately result in a devaluation or revaluation of the currency. Hence, the true currency risk does not show up in day-to-day fluctuations of the exchange rate. It is hard to quantify this...
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...Assignment 2: What is Gross Domestic Product? 1. GDP for 2009? According to the NIPA Tables 1.1.5, 2012 the Real GDP (Gross Domestic Product) for 2009 was 13,973.7. a. What does GDP tell us? The GDP acts as a yardstick used to gauge information concerning a country’s economy. It also tells us s the total dollar value of all services and goods made during a particular time period. b. How did GDP change from 2008? In the first two quarters, GDP saw growth. Although the GDP began to slightly decline in the third quarter, the importing and exporting of services and goods actually increased. The real GDP and the personal consumption expenditures decreased in the fourth quarter. c. What caused these changes? The economy was stagnant which resulted in a recession. When a recession happens private investment and personal consumption expenditures dramatically decrease. 2. What was GNP for 2009? According tp the NIPA Tables 1.7.5, 2012 The GNP for 2009 was 14,117.20. a. What is the difference between GDP and GNP? The total market value for all services and goods produced in the United States is defined as GDP (Gross Domestic Product) . The total market value for services and goods which were created by labor is the GNP (Gross National Product). b. How did GNP change from 2008? GNP increased throughout 2008 but started decreasing in 2009. The labor force was climaxing in late 2008. Then it began to decline again as ‘discouraged workers’...
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...What happened on December 23, 1913 at Jekyll Island that has completely changed the landscape of the monetary system in United States? Since its inception in 1913, the Federal Reserve has been the Central Bank of the United States of America. There are many questions about the Federal Reserve:; Its legality, its morality and the intentions of the founders and of those who currently are in authority. Was the Federal Reserve necessary when it was started? Is it necessary now? There is a growing group of people who believe that the role the Fed has taken violates everything our country was founded upon- being a part of the government that is by the people and for the people and that it has not lived up to its mandate of making sound monetary decisions that positively impact the present and future of this great nation. The Federal Reserve is a privately held entity that controls the monetary system of the United States, but has no definable role in government, does not answer to any branch of government for it’s actions; it should be disbanded and replaced to ensure special interests are not in control of the monetary system, while eliminating boom and bust economic cycles and bring back fundamental principles of checks and balance for this country and its economy. To truly understand the Federal Reserve as it is today, what it was intended to be when it first started and if it is still a necessary entity, it’s important to look at its origins. Throughout history, in times of...
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...lessening of restrictions on imports and lowering of tariff on imports which the economic reform implies, an increase in imports has in fact taken place. Again with trade having become an important element of the new strategy of growth. India got freedom from British rule on Aug 15, 1947. At that time the Indian rupee was linked to the British pound and its value was at par with the American dollar. There was no foreign borrowing on India's balance sheet. To finance welfare and development activities, especially with the introduction of the Five-Year Plan in 1951, the government started external borrowings. This required the devaluation of the rupee.- After independence, Indian choose to adopt a fixed rate currency regime. The rupee was pegged at 4.79 against a dollar between 1948 and 1966. India faced a serious balance of payment crisis in 1991 and was forced to sharply devalue its currency. The country was in the grip of high inflation, low growth and the foreign reserves were not even worth to meet three weeks of imports. Under this situation, the currency was devalued to 17.90 against a dollar. India being a developing economy with high...
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...Asian Crisis • What happened and when did it happen? Asian Crisis that hit pacific Asian in middle 1997, it liked a big earthquake suddenly hit Southern Asia. In Thailand, the July 2, 1997 when it currency had to devalue, the baht, about 20% against the US dollar, as a result of intense pressure in the foreign exchange market. Not only currency speculators but also many Thai residents were trying to sell the baht and buy the US dollar, causing and worsening capital flight out of the country, as the Thai government was running out of its foreign reserves and losing market confidence in maintaining the currency value and financial stability. The interest rates were shot up, as the outflow of short-term capital intensified. Then, the previously inflated stock and real estate markets collapsed and that has led to Thailand's worst recession in the postwar period with sharply rising unemployment and business failures, and the exports cheaper, pressuring other currencies to follow suit. Once the crisis hit Thailand, it has quickly spread to Indonesia. it's rupiah came under vicious attack and had to be devalued by about 90% over the period of just a few months. Interest rates were rising sharply, as capital flight from Indonesia was accelerating a complete collapse in the financial as well as the political system in that country. The Asian Crisis also has brought down South Korea, just like Indonesia and Thailand, has gone almost bankrupt as a nation and is receiving financial...
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