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Chapter 8: Lecture NotesChapter 9: Lecture NotesLecture NotesTextbook Chapter NotesVocabularyReviewChapter 7: International FinanceChapter 7: International Finance Lecture NotesInternational Financial RelationsI. International Finance10/24/2011a. Every year, trillions of dollars are loaned across bordersb. The U.S. is 4.5 trillion dollars in debt to other countries (January 2011)c. China holds about 36% of foreign-owed U.S. debtII. Factor Flowsa. Trade in goods and factor flows across national borders are (near) perfect substitutesb. Comparative Advantage: countries should permit free flows of capital or labor into or out of its economyIII. Types of Capital Flowsa. Portfolio Investmentb. Loans and bonds provide income to lenderc. No control over the assets of the borrowerd. Is simply a loan of money (a student loan is a portfolio investment)IV. Foreign Direct Investment (FDI)a. Investor acquires real assets (facilities) in a foreign countryV. Concessional Financea. Money lent at market ratesb. Why Invest? Why Borrow?c. Investors: earn higher rates of return on their moneyd. Borrowers: increase productivity of other factors of production (especially labor)e. Productivity should generate enough wealth to pay back investors with interestVI. How Should Factors of Production Flowa. Factor flows determined by relative factor abundanceb. Capital flows from abundant (rich) to scarce (poor) countriesc. Labor flows from abundant (poor) to scarce (rich) countriesVII. The Political Economy of Capital FlowsVIII. How should Capital Flowa. If Heckscher-Ohlin works, all foreign investment should be in poor countriesb. But only 10% of investment goes to developing countriesc. This is because the investment is riskyIX. Costs and Benefits of Investment10/26/2011a. Debt can be used to increase development and productivityb. As national output rises, tax revenue increases, making it easier to pay off debtsc. But governments often impose unpopular measures to pay off loansd. Cut spending, raise taxes, hike interest rates (which restrains wages, profits, and consumption)e. This may cause a recession or even a depressionf. Benefits and costs of foreign investment do not equally affect every citizeni. Example: bailing out Wall Street at the expense of Main Street1. Risk and Foreign Investment2. Without system for enforcement, high risk of default on loans3. Higher risk means less capital flows to developing countries, (or flows of higher rate of interest)4. To attract investment, risk must be managedX. How is Risk Manageda. Repeated lendingb. Default may shut borrowing countries out of international financial marketsc. Force of punishment for defaultd. Institutions of International Financee. Rules and institutions also help manage riskf. Makes creditors and borrowers both better offg. International Monetary Fund oversees international lendingXI. How Does IMF Work?a. Short term lending to help with balance of paymentsb. Long term loans to help with structural weaknessc. Loans often come with conditionsi. Conditionality (stabilization agreement)1. These agreements often require governments to reduce spendingXII. IMF Controversy a. Cutting government spending can result in cuts to vital programsb. These cuts affect the poorest citizens in a countryc. IMF stabilization agreements often lead to domestic protestsd. The IMF is criticized as being biased towards lenderse. But reducing risk of default permits more loans to be made at lower ratesXIII. US and IMGa. The US’s current investment with IMF is 42 billioni. Leads to 17.2% of the voting shareii. 85% of votes needed to pass a major decisionXIV. MNC and Foreign Direct Investmenta. MNC’s invest in other countries to gain access to their market and resourcesb. Foreign managerial technological, and marketing skills as well as investment capitalc. Yet MNCs often attract controversyd. Host counties complain about MNC’se. Investing countries blame MCS for not thinking locallyXV. International Institutions and the FDIa. There isn’t a global institution that regulates FSIb. Most regulation occurs through bilateral investment treatiesXVI. International migrationa. People as well as money, can flow cross bordersi. In the 1800s and early 1900s international labor migration rates were much higher than they are todayXVII. Inflow of unskilled labor from abroad reduces the wage of low skilled workersXVIII. Benefits of immigration a. Employers gain from lower wagesb. A larger labor force and lower cost of production1. What is the International Monetary Fund? An international organization that addresses financial crises2. How does the Heckscher-Olin theory explain increasing investment in emerging markets? Loans are made to countries where capital is scarce.3. Which of the following is an example of foreign direct investment? Firestone builds a plant in Liberia.4. Which company opened production in Costa Rica in 1997? Intel5. What sparked the 1997 East Asian financial crisis? The insolvency of a large bank in Thailand6. What did the IMF advise Indonesia to do during the 1997 Asian financial crisis? Cut subsidies.7. Which country had the most international migrants in 2005? The United States8. What does it mean to default? Failing to repay a loan9. Which of the following most contributed to the 2008 financial crisis in the United States? Heavy borrowing to finance the government’s deficit10. Which of the following statements regarding labor movement patterns is most accurate? Unskilled workers are attracted to developed countries.11. What is the World Bank? An organization that engages in concessional finance12. Which developing countries have the most debt? Brazil, Mexico, and Argentina13. Which company supported attempts to overthrow President Allende of Chile? International Telephone and Telegraph14. What are portfolio investments? Situations where investors do not directly manage their investment15. What region experienced a debt crisis beginning in 1982? Latin America16. How is most foreign direct investment regulated? By bilateral treaties17. Why do corporations become multinational? To avoid trade barriers To employ labor more cheaply To take advantage of local resources18. Where does most foreign investment occur? Advanced economies19. In 2004, approximately how many dollars were invested in emerging markets? 4 trillion20. Approximately what percentage of foreign investment goes to the


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FSU INR 2002 - Chapter 7: International Finance

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