Chapter 2 World Trade in Goods and Capital 1 Integration of the World’s Markets


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Chapter 2 World Trade in Goods and Capital

  • 2.1 Integration of the World’s Markets

  • 2.2 Balance-of-Payments Statistics

  • 2.3 Exchange Rate Systems

  • 2.4 A History of the International Monetary System

  • 2.5 Summary

  • Appendix 2-A The Theory of Comparative Advantage


Integration of the world’s markets

  • Completion of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT)

  • Creation of the World Trade Organization (WTO)

  • Trend toward free market economies

  • Industrialization of the Far East and Pacific Rim

  • Rise of regional economic linkages and trade pacts

  • Fall of the Iron Curtain

  • Reunification of East and West Germany

  • Hong Kong’s 1997 return to China

  • Entry of China into international trade



U.S. merchandise trade



The U.S. balance of payments

  • 1990 1995

  • Goods: Export f.o.b. 389.31 576.76

  • Goods: Import f.o.b. 498.34 749.77

  • Trade balance 109.03 173.01

  • Services: Credit 147.70 206.79

  • Services: Debit 117.63 143.93

  • Balance on Goods & Serv. 78.96 110.16

  • Income: Credit 160.42 181.47

  • Income: Debit 140.71 194.11

  • Balance on Goods, Serv. & Inc. 59.25 122.80

  • Current Transfers: Credit 8.79 5.74

  • Current Transfers: Debit 42.45 35.93

  • Current Account 92.91 152.98

  • Source: IMF publication International Financial Statistics.



The U.S. balance of payments (continued)

  • 1990 1995

  • Capital Account: Credit 0.26 0.53

  • Capital Account: Debit  0.43

  • Capital Account 0 0

  • Direct Investment Abroad 29.95 96.90

  • Dir. Inv. in Reporting Economy 47.92 74.70

  • Portfolio Investment: Assets 28.80 93.77

  • Portfolio Investment: Liabilities 4.20 191.39

  • Other Investment Assets 13.73 79.69

  • Other Investment Liabilities 43.19 54.61

  • Financial Account 14.42 50.35

  • Net Errors and Omissions 44.52 6.66

  • Overall Balance 33.71 95.88

  • Source: IMF publication International Financial Statistics.



Classifications of exchange rate systems

  • An economist’s classification system

    • Fixed rate systems
    • Floating rate systems
  • The IMF’s classification system



Major exchange rate agreements



A history of the international monetary system

  • 1946 Bretton Woods Conference

    • The U.S. dollar is convertible into gold at $35/ounce
    • Other currencies pegged to the dollar
    • Created IMF and World Bank


History of the international monetary system

  • 1971 Exchange rate turmoil

  • 1971 Smithsonian Agreement (Group of Ten)

    • dollar devalued to $38/oz of gold
    • other currencies revalued against the dollar
    • 4.5% band adopted
  • 1972 European Joint Float Agreement



History of the international monetary system

  • 1976 Jamaica Agreement

    • Floating rates declared “acceptable”
  • 1979 European Monetary System (EMS)

    • European Exchange Rate Mechanism (ERM) established to maintain currencies within a 2.25% band around central rates
    • European currency unit (ECU) created


History of the international monetary system

  • 1985 Plaza Accord (Group of Ten)

    • The Group of Ten form an agreement to cooperate in controlling volatility and bringing down the value of the dollar
  • 1987 Louvre Accord

    • The Group of Five agree to maintain current levels


History of the international monetary system

  • 1991 Treaty of Maastricht

    • European community members agree to pursue a broad agenda of economic, financial and monetary reforms
    • A single European currency is proposed as the ultimate goal of monetary union
  • 1999 Introduction of the euro

  • 2002 The euro begins public circulation



Mexican peso crisis



The Asian contagion (December 31, 1996 = 1.00)




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