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

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

• Pegged systems
• Limited flexibility systems
• More flexible systems

Major exchange rate agreements

• 1946 Bretton Woods Conference
• 1971 Smithsonian Agreement
• 1972 European Joint Float Agreement
• 1976 Jamaica Agreement
• 1979 European Monetary System (EMS) created
• 1985 Plaza Accord
• 1987 Louvre Accord
• 1991 Treaty of Maastricht

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

• dollar falls off the gold standard
• most currencies begin to float on world markets

• 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

• “The snake” adopted by EEC

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

• Emu-zone currencies are pegged to the euro
• European bonds convert to the euro

• 2002 The euro begins public circulation

Mexican peso crisis

The Asian contagion (December 31, 1996 = 1.00)