The Balance of The Balance of Payments and Exchange Payments and Exchange Rates; Global EconomyRates; Global Economy

Learning outcomesLearning outcomes By studying this section students will By studying this section students will

be able to:be able to:– understand the arguments for free trade, understand the arguments for free trade,

the role of the WTO and GATSthe role of the WTO and GATS– understand the balance of payments understand the balance of payments

accountsaccounts– understand the significance of exchange understand the significance of exchange

rates to recreation, leisure and tourism rates to recreation, leisure and tourism organizationsorganizations

– distinguish between spot and forward distinguish between spot and forward rates of exchangerates of exchange

Leisure and TradeLeisure and Trade

Tourists arriving at Tourists arriving at Koh Phi Phi, Koh Phi Phi, Thailand bringing Thailand bringing foreign currency to foreign currency to spendspend

Changi Airport Changi Airport Singapore. Foreign Singapore. Foreign currency earnings currency earnings from transit touristsfrom transit tourists

Free tradeFree trade

Ricardo argued that specialisation and Ricardo argued that specialisation and trade would lead to an increase in total trade would lead to an increase in total output compared to a position of no output compared to a position of no specialisation and trade, based upon specialisation and trade, based upon greater efficiency of production.greater efficiency of production.– it will benefit countries to specialise in it will benefit countries to specialise in

producing those goods and services which it is producing those goods and services which it is the very best at producing (where it has a the very best at producing (where it has a ‘comparative advantage’ over other countries)‘comparative advantage’ over other countries)

– specialisation also leads to economies of scale specialisation also leads to economies of scale and acquired expertiseand acquired expertise

WTO and GATS WTO and GATS

The WTO (World Trade The WTO (World Trade Organisation) is the international Organisation) is the international agency that promotes free trade agency that promotes free trade and its GATS (General and its GATS (General Agreement on Trade in Services) Agreement on Trade in Services) is the treaty that seeks to is the treaty that seeks to operationalise this aim. operationalise this aim.

WTO and GATS WTO and GATS Free trade liberalisation under GATS is Free trade liberalisation under GATS is

based on three specific pillars:based on three specific pillars:– 1. Market access: Foreign owned companies 1. Market access: Foreign owned companies

have free access to domestic marketshave free access to domestic markets– 2. Most Favoured Nation Status: Concessions 2. Most Favoured Nation Status: Concessions

granted to any one country must also be made granted to any one country must also be made available on a non-discriminatory basis to all available on a non-discriminatory basis to all other signatories of the agreement.other signatories of the agreement.

– 3. National treatment: Foreign investors must be 3. National treatment: Foreign investors must be treated on an equal basis with domestic treated on an equal basis with domestic investors, domestic investors must not receive investors, domestic investors must not receive any favourable treatment that could be any favourable treatment that could be conceived as protectionist.conceived as protectionist.

Limits to trade benefitsLimits to trade benefits extra costs involved in currency extra costs involved in currency

conversion and risk.conversion and risk. transport costs can add to production transport costs can add to production

costs.costs. many countries seek to protect their many countries seek to protect their

home markets by protectionist home markets by protectionist policies.policies.

most countries wish to maintain most countries wish to maintain some balance of production in key some balance of production in key strategic goods and services so as strategic goods and services so as not to expose themselves to over-not to expose themselves to over-dependence on foreign countries.dependence on foreign countries.

Trading blocs Trading blocs

The European Union (EU)The European Union (EU) North American Free Trade North American Free Trade

Agreement (NAFTA)Agreement (NAFTA) The Asia-Pacific Economic The Asia-Pacific Economic

Cooperation forum (APEC)Cooperation forum (APEC) ASEAN Free Trade Agreement (AFTA)ASEAN Free Trade Agreement (AFTA)

The terms of tradeThe terms of trade

measures the relative prices of what measures the relative prices of what a country exports in relation to the a country exports in relation to the prices of its imports. prices of its imports.

A persistent argument put forward by A persistent argument put forward by developing countries is that they developing countries is that they face unfavourable terms of trade in face unfavourable terms of trade in comparison with developed comparison with developed countries. countries.

The balance of paymentsThe balance of payments The balance of payments is an account The balance of payments is an account

which shows a country’s financial which shows a country’s financial transactions with the rest of the world. transactions with the rest of the world.

It records inflows and outflows of It records inflows and outflows of currency.currency.

the balance of payments has three the balance of payments has three main componentsmain components– a current a current – a capital a capital – and a financial account. and a financial account.

The current accountThe current account

The current account records The current account records payments for trade in goods and payments for trade in goods and services and is thus divided into two services and is thus divided into two parts: visible and invisible trade.parts: visible and invisible trade.– Visibles = exports and imports in goodsVisibles = exports and imports in goods– Invisibles = the trade in services or Invisibles = the trade in services or

intangiblesintangibles

Leisure Balance of Leisure Balance of PaymentsPayments

Tourism is an Tourism is an important foreign important foreign currency earner for currency earner for many countriesmany countries

Tourism vs other exports: Tourism vs other exports: AustraliaAustralia

The capital and financial The capital and financial accountaccount

InvestmentInvestment– Direct investment is the direct purchase of Direct investment is the direct purchase of

firms or land or buildings abroad. Portfolio firms or land or buildings abroad. Portfolio investment is the purchase of securities or investment is the purchase of securities or shares abroad. Such activity leads to an shares abroad. Such activity leads to an outflow of funds, but a potential future inflow outflow of funds, but a potential future inflow of profits or dividends under invisibles in the of profits or dividends under invisibles in the current account. current account.

Lending and borrowingLending and borrowing– This records international loans. This records international loans.

Official reserves activityOfficial reserves activity– Government use of official reserves of foreign Government use of official reserves of foreign

currencies is recorded here. currencies is recorded here.

Government policyGovernment policy An acute long-term current An acute long-term current

account deficit will require account deficit will require government intervention. This government intervention. This may take the form of:may take the form of:– devaluation or currency devaluation or currency

depreciationdepreciation– protectionismprotectionism

Exchange ratesExchange rates Significance of Significance of

exchange rates:exchange rates:– How does a rise in a How does a rise in a

country’s exchange country’s exchange rate affect leisure and rate affect leisure and tourism?tourism? Makes imports cheaper Makes imports cheaper

(e.g. clothes, equipment)(e.g. clothes, equipment) Makes exports dearer Makes exports dearer

(e.g. discourages (e.g. discourages inbound tourists)inbound tourists)

Determination of floating Determination of floating exchange ratesexchange rates

A floating exchange rate is one which is A floating exchange rate is one which is determined in the market without determined in the market without government intervention. government intervention.

Here the exchange rate is determined, like Here the exchange rate is determined, like most prices, by the forces of demand and most prices, by the forces of demand and supply. supply.

Using the Australian $ to stand for all Using the Australian $ to stand for all foreign currencies, we can identify the foreign currencies, we can identify the main determinants of the demand for and main determinants of the demand for and supply of sterling as follows:supply of sterling as follows:

Exchange RatesExchange Rates

A fixed exchange rate system is where the A fixed exchange rate system is where the price of one currency is fixed in terms of price of one currency is fixed in terms of another currency. another currency.

Spot and Forward MarketsSpot and Forward Markets– The spot market is the immediate market in The spot market is the immediate market in

foreign currency and represents the current foreign currency and represents the current market rate. Payment is made today and the market rate. Payment is made today and the transaction takes place today at today’s rate. transaction takes place today at today’s rate.

– The forward market exists to satisfy demand for The forward market exists to satisfy demand for a guaranteed future exchange rate. Payment is a guaranteed future exchange rate. Payment is made today but the transaction is made in the made today but the transaction is made in the future (e.g. 3 months) at a rate agreed today. future (e.g. 3 months) at a rate agreed today.

Exchange rate and Exchange rate and government policygovernment policy

Governments may attempt to influence the Governments may attempt to influence the exchange rate. exchange rate.

Policy instruments to affect the exchange Policy instruments to affect the exchange rate consist of rate consist of – interest rates and interest rates and – direct buying and selling of currency by the direct buying and selling of currency by the

Central Bank. Central Bank. Raising interest rates will generally increase Raising interest rates will generally increase

the demand for a currency as savings are the demand for a currency as savings are moved from overseas banks to domestic moved from overseas banks to domestic banks to benefit from higher interest rates.banks to benefit from higher interest rates.

GlobalizationGlobalization

Learning outcomesLearning outcomes

By studying this section students By studying this section students will be able to:will be able to:– explain the meaning of explain the meaning of

globalizationglobalization– explain the meaning of an MNEexplain the meaning of an MNE– understand the motives for understand the motives for

extending operations overseasextending operations overseas

GlobalizationGlobalization

Robertson (1992: 8) describes Robertson (1992: 8) describes globalization as:globalization as:– ““the compression of the world and the the compression of the world and the

intensification of consciousness of the intensification of consciousness of the world as a whole . . . . concrete global world as a whole . . . . concrete global interdependence and consciousness of interdependence and consciousness of the global whole in the twentieth the global whole in the twentieth century" century"

Economic GlobalizationEconomic Globalization Friedman (1999: 7-8) offers the following Friedman (1999: 7-8) offers the following

definition:definition: "[T]he inexorable integration of markets, "[T]he inexorable integration of markets,

nation-states, and technologies to a degree nation-states, and technologies to a degree never witnessed before-in a way that is never witnessed before-in a way that is enabling individuals, corporations and enabling individuals, corporations and nation-states to reach around the world nation-states to reach around the world farther, faster, deeper and cheaper than farther, faster, deeper and cheaper than ever before . . . . the spread of free-market ever before . . . . the spread of free-market capitalism to virtually every country in the capitalism to virtually every country in the world”world”

Economic GlobalizationEconomic Globalization

Refers to the increasing integration Refers to the increasing integration of economies around the world. of economies around the world.

This integration is evident mainly This integration is evident mainly throughthrough– trade and financial flows but it also trade and financial flows but it also

includesincludes– the movement of people (labour) andthe movement of people (labour) and– knowledge (technology) knowledge (technology)

across international borders across international borders

Benefits of GlobalizationBenefits of Globalization

– improved communicationsimproved communications– a more open worlda more open world– the advent of new, better and the advent of new, better and

cheaper productscheaper products– the reduction in barriers to tradethe reduction in barriers to trade– its contribution to faster economic its contribution to faster economic

growth. growth.

Benefits of GlobalizationBenefits of Globalization

Advocates of globalization see the major Advocates of globalization see the major problem that it is not progressing evenly. problem that it is not progressing evenly. – They note that some countries have been They note that some countries have been

integrated into the global economy more integrated into the global economy more quickly than others and that these are seeing quickly than others and that these are seeing faster growth and reduced poverty. faster growth and reduced poverty.

– For example free trade policies have brought For example free trade policies have brought dynamism and greater prosperity to much of dynamism and greater prosperity to much of East Asia, transforming it from one of the East Asia, transforming it from one of the poorest areas of the world 40 years ago.poorest areas of the world 40 years ago.

Problems of GlobalizationProblems of Globalization Here concerns are expressed about Here concerns are expressed about

– the deterioration in the well-being of particular the deterioration in the well-being of particular groupsgroups

(these range from whole countries, to workers in (these range from whole countries, to workers in developed countries who have seen their jobs developed countries who have seen their jobs exported, to workers in developing countries who exported, to workers in developing countries who work under conditions of exploitation),work under conditions of exploitation),

– the sovereignty and identity of countries,the sovereignty and identity of countries,– the disparities of wealth and opportunities the disparities of wealth and opportunities

among countries and peopleamong countries and people– the health of the environmentthe health of the environment– the greater exposure it brings countries to the greater exposure it brings countries to

sudden and profound economic shocks.sudden and profound economic shocks.

Meaning and extent of Meaning and extent of multinational enterprisemultinational enterprise

An MNE is one which has production or An MNE is one which has production or service capacity located in more than one service capacity located in more than one country. The MNE has a headquarters in a country. The MNE has a headquarters in a parent country and extends its operations parent country and extends its operations into one or more host countries. into one or more host countries.

The main ways in which multinational The main ways in which multinational operations are extended are by operations are extended are by – investment in new or ‘greenfield’ capacityinvestment in new or ‘greenfield’ capacity– by taking an equity stake in a foreign company by taking an equity stake in a foreign company

(i.e. buying up shares) (i.e. buying up shares) – or by operating a franchise or alliance with a or by operating a franchise or alliance with a

foreign company. foreign company.

The EndThe End