1. WK11.1 Agenda News, Daily good deeds Project: Homework: Topic by Friday January 14, 2011. How and where to find the impact information? Presentation: Friday January 21, 2011. Exam Part II: Wednesday January 26, 2011. Session III will start January 12, 2011 Last week article Monday Discovery 1 Inter Bus, BBA 2010

2. Article Read the article and answer the questions. What do you call Chinese exporters that promote their products to US or EU through Thailand? Do you think it’s ok? Will this benefit Thailand? What is rule of origin? What is custom union? What’s 10 billion Yuan equal to Thai baht? Inter Bus, BBA 2010 2

3. Picture Discovery Inter Bus, BBA 2010 3

4. Picture Discovery Inter Bus, BBA 2010 4

5. Picture Discovery Inter Bus, BBA 2010 5

6. Picture Discovery Real GDP; quarterly percent change from one year earlier What countries have high risk of deflation? Inter Bus, BBA 2010 6

7. Picture Discovery What’s the trend in 2010? What are the major currencies? Why should we study about it? Inter Bus, BBA 2010 7

8. Picture Discovery What’s this? What’s the meaning of this chart? Inter Bus, BBA 2010 8

9. IMF Games Play Monetary Mania from the IMF website. http://www.imf.org/external/np/exr/center/econed/index.htm Jot down the important information(Money, Economics, Monetary, etc.). Report your group knowledge on the board. Play World Trader from IMF. What score did you get? Did you achieve your goal? What did you learn? Inter Bus, BBA 2010 9

10. WK11.2 Agenda News, Daily good deeds Next Wednesday January 19, 2010: Meditation Project Next Friday January 21, 2010 Exam Part II Next Wednesday 26, 2010. More Discovery Inter Bus, BBA 2010 10

11. Big Mac Exercise Law of one price: In an efficient market, the price of the same product should be the same everywhere, else the process of arbitrage will occur. If we want the same price as in the US., what should be the exchange rate? Inter Bus, BBA 2010 11

12. Big Mac Exercise Law of one price: In an efficient market, the price of the same product should be the same everywhere, else the process of arbitrage will occur. In the long run what would happen to the exchange rate of each country? What are the limitations of using Big Mc index? Differences in tax, cost of production(rent & labor), consumer preferencesdifference market position and price Inter Bus, BBA 2010 12

13. Interest, Inflation and Exchange Rate Where will you invest? Thailand: Nominal interest 2%, inflation 5% China: Nominal interest 3%, inflation 1% How can you make money? Japan: interest rate 1% Australia: bond yield 6% According to the Fisher effect, real interest rate of countries should be the same, what would happen to the exchange rate? What are the relationship of interest rate, inflation, and exchange rate? Fisher Effect Real interest rate=Nominal interest rate-Inflation International Fisher Effect Concept that the interest rate differentials for any two currencies will reflect the expected change in their exchange rate. Inter Bus, BBA 2010 13 ¥ ¥

14. Video Clip Discovery US-China currency dispute What does the US want? Why? Where does China put the money from trade? What is hot money? Why they are afraid of it? What happens when the currency appreciate? Inter Bus, BBA 2010 14

15. Reading Discovery Read the following article and answer the questions. US BOP: Is the sky falling? Inter Bus, BBA 2010 15

16. Article: U.S. BOP Deficit Inter Bus, BBA 2010 16

17. Video Clip Discovery Economic Problem http://www.imf.org/external/mmedia/view.asp?eventID=226&redirect=false Complete the exercise on the sheet provided. US-China currency dispute What does the US want? Why? Where does China put the money from trade? What is hot money? Why they are afraid of it? What happens when the currency appreciate? Inter Bus, BBA 2010 17

18. WK11.3 Agenda News, Daily good deed Project update, information, grading criteria Working on campus Meditation class on Wednesday January 19, 2011 Lecture Class wrap up Inter Bus, BBA 2010 18

19. International Monetary System The international monetary system: Establishes the rules by which countries value and exchange their currencies and provides a mechanism for correcting imbalances between a country’s international payments and receipts. Inter Bus, BBA 2010 19

20. History of IMS Inter Bus, BBA 2010 20

21. Gold Standard Each country set its par value(unit of its currency) to an ounce of gold. Currencies were pegged to gold. The ratio of the two currencies equal to the gold equivalence establishes the exchange rate between the two countries. Gold Specie: gold coin as money Gold Bullion: the government can print out the money equal to the gold reserve Discipline, Security, Flexibility WW period, great depression, beggar-thy-neighbor policies Bank couldn’t redeem the money for gold at the par value. Inter Bus, BBA 2010 21 UK: 1 once of gold=4 £ US: 1 once of gold=20 $ France: 1 once of gold = 10 franc Exchange rate UK/US=? US/France? 4/20=1 £ per 5 $, 2 $ per franc

22. Bretton Woods Agreement Inter Bus, BBA 2010 22

23. Bretton Woods System Triffin Paradox: A national currency that is also a reserve currency will eventually run a deficit, which eventually inspires a lack of confidence in the reserve currency and leads to a financial crisis. The deficit was financed partly by the shrinking gold reserve and liabilities to other foreign central banks. End of Bretton Woods: President Richard Nixon announcement: U.S. dollar inconvertible to gold G10 Smithsonian Conference Inter Bus, BBA 2010 23

24. Floating Currency Exchange Rate System Floating currency exchange rates: Rates that are allowed to float against other currencies and are determined by market forces. Which direction is for depreciation? Inter Bus, BBA 2010 24

25. Summary of Currency Arrangements Inter Bus, BBA 2010 25

26. Current Currency Arrangements Categorized by IMF Exchange arrangement with no separate legal tender: one country adopt the currency of another(Timor, Panama) or a group of countries adopting a common currency(Euro). Currency board arrangements: the board legislate the fixed exchange rate and control the domestic money supply through foreign reserves(Brunai). Other conventional fixed peg arrangements: fixed rate with + 1% (Saudi) Pegged exchange rates within horizontal band:the exchange rate could fluctuate greater than 1% (Denmark) Crawlingpegs: the currency is readjusted periodically at a fixed, preannounced rate Crawling banks: the currency readjustments to maintain fluctuation margins around a central rate. Managed floating with no preannounced path for the exchange rate: the government actively intervene the exchange rate depending on the economic indicators(BOP, reserve, interest rate, etc.) China, Malaysia, Singapore Independently float exchange rates: There maybe government intervention to moderate the rate of change not the rate establishment (USA, Japan, UK) Inter Bus, BBA 2010 26

27. Exchange Rate Quotations Inter Bus, BBA 2010 27 Forward premium: 1$/35 Baht Spot rate: 1$/30 Baht Forward discount: 1$/28 Baht

28. Exchange Rate Quotations Direct rate: one unit of the local currency to foreign currency (1 Baht/0.033$) Examples of the indirect rate: (1$/30 Baht), (1€/40 Baht), (1Yuan/4.8 Baht) Cross rate: calculate the exchange rate of the two countries using the third major currency ($/Yuan=?) Arbitrage:? purchase of a product in one market for immediate resale in a second market in order to profit from a price discrepancy. In the market 1$/6.6 Yuan, how can we profit from Yuan, Baht, and Dollar? Inter Bus, BBA 2010 28

29. Exchange Rate Movement Inter Bus, BBA 2010 29

30. Theories of Exchange Rate Inter Bus, BBA 2010 30

31. Big Mac Exercise Law of one price: In an efficient market, the price of the same product should be the same everywhere, else the process of arbitrage will occur. In the long run what would happen to the exchange rate of each country? What are the limitations of using Big Mc index? Differences in tax, cost of production(rent & labor), consumer preferencesdifference market position and price Inter Bus, BBA 2010 31

32. Interest, Inflation and Exchange Rate Fisher Effect Real interest rate=Nominal interest rate-Inflation International Fisher Effect Concept that the interest rate differentials for any two currencies will reflect the expected change in their exchange rate. Where will you invest? Thailand: Nominal interest 2%, inflation 5% China: Nominal interest 3%, inflation 1% How can you make money? Japan: interest rate 1% Australia: bond yield 6% What would happen to the exchange rate? Inter Bus, BBA 2010 32 ¥ ¥

33. Balance of Payment The BOP accounting system is a double-entry bookkeeping system designed to measure and record all economic transactions between residents of one country and residents of all other countries during a particular time period. Assists policy makers in designing appropriate public policies. In theory: Current Account + Capital Account + Official Reserves Account = 0 Inter Bus, BBA 2010 33

34. Summary History Theories to explain the direction of: Interest Rate Inflation Exchange rate Balance of payment Exchange rates affect business operations in three primary areas: marketing, production, and finance. Examples? Inter Bus, BBA 2010 34 α

35. Class Wrap Up Change? News, knowledge Daily good deeds Language skills Responsive Inter Bus, BBA 2010 35

36. Video Clip Review US Trade deficit controversial plan. What’s the government plan to fix the problem? What are the pros and cons of the plan? Inter Bus, BBA 2010 36