I NTERNATIONAL FINANCE : A N O VERVIEW

B ALANCE OF P AYMENTS A balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, and financial capital, as well as financial transfers. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items.

B ALANCE OF P AYMENTS The BOP is divided into 2 accounts The Current account The Capital account The Current Account: A broad measure that includes merchandise trade and service trade. The Capital Account A record of all long term direct investment, portfolio investment and other short term, long term capital flows Refer Table Page 93

B ALANCE OF P AYMENTS -T HAILAND Bank of Thailand EC_XT_010 : Balance of Payments (Summary) (Unit : Millions of Baht) Last Updated : 31 May :32 Retrieved date : 08 Jun : Exports (f.o.b.) 6,120, ,155, ,831, ,212, (% change) (% change) Imports (c.i.f.) -5,681, ,485, ,845, ,773, (% change) (% change) Trade balance 439, , , , Net services income & transfers 23, , , , Current account balance 463, , , , Capital and financial account 503, , , , Monetary authorities Monetary authorities 82, , , , Government Government 103, , , , Bank Bank 307, , , , Others Others 9, , , , Net errors & omissions 19, , , , Balance of payments 986, , , , Source: Bank of Thailand

US Goods and services trade with Brazil, India and China ( US $ millions) (p. 94) CHINAINDIABRAZIL US Goods exports to Goods import from Balance on Goods-256,612-6,586-1,153 US Service Exports to Services imports from US Balance on services5, ,873 US Balance on Goods and services -251,198-6,7434,720

©2011 Pearson Education, Inc. publishing as Prentice Hall 3-7 Purchasing Power Parity(PPP) Purchasing power parity (PPP) is a theory of long-term equilibrium exchange rates based on relative price levels of two countries. law of one price, identical goods will have the same price in different markets when the prices are expressed in terms of one currency.The concept is founded on the law of one price, the idea that in absence of transaction costs and official barriers to trade, identical goods will have the same price in different markets when the prices are expressed in terms of one currency.

©2011 Pearson Education, Inc. publishing as Prentice Hall 3-8 Purchasing Power Parity(PPP) A country’s currency is overvalued if the Big Mac price (Converted to dollars) is higher than in the US. A country’s currency is undervalued if the converted Big Price is lower than the US price. A country’s currency is overvalued if the Big Mac price (Converted to dollars) is higher than in the US. A country’s currency is undervalued if the converted Big Price is lower than the US price.

©2011 Pearson Education, Inc. publishing as Prentice Hall 3-9 Managing Exchange rate Exposure Hedging –Forward & Future Markets –Options Call Put

©2011 Pearson Education, Inc. publishing as Prentice Hall 3-10 Hedging Hedging exchange rate exposure involves establishing an offsetting currency position such that the loss or gain of one currency position is offset by a corresponding gain or loss in some other currency.

©2011 Pearson Education, Inc. publishing as Prentice Hall 3-11 Forwards With a forward contract, the company can lock in a specific fixed exchange rate for a future date and thus immunize itself from the loss ( or gain) caused by the exchange rate fluctuation. In addition to spot prices, 30-, 60- and 180 day forward prices are traded for dozens of world currencies.

©2011 Pearson Education, Inc. publishing as Prentice Hall 3-12 Put Options Gives the buyer the right,(not obligation) to sell a specified number of foreign currency units at a fixed price until the options expiration date.

©2011 Pearson Education, Inc. publishing as Prentice Hall Call Options 3-13  Gives the buyer the right,(not obligation) to buy a specified number of foreign currency units at a fixed price until the options expiration date.

14 Global Marketing Chapter 3 Regional Market Characteristics and Preferential Trade Agreements

©2011 Pearson Education, Inc. publishing as Prentice Hall 3-15 Introduction This chapter looks at: –Global trade organizations –Four types of agreements –Individual countries and their preferential trade agreements

©2011 Pearson Education, Inc. publishing as Prentice Hall 3-16 Many countries seek to lower barriers to trade within their regions PTAs give partners special treatment and may discriminate against others Over 150 PTAs have been notified to the WTO ASEAN- PR CHINA PTA (2005) Thailand- Laos (1991) Preferential Trade Agreements

©2011 Pearson Education, Inc. publishing as Prentice Hall 3-17 Free Trade Area Two or more countries agree to abolish tariffs and other barriers to trade amongst themselves. Countries continue independent trade policies with countries outside agreement. Rules of origin requirements restrict transshipment of goods from the country with the lowest tariff to another. (ACFTA), in effect as of 1 January 2010 (AIFTA), in effect as of 1 January 2010 NAFTA Protest in Ottawa

©2011 Pearson Education, Inc. publishing as Prentice Hall 3-18 North America—NAFTA Canada, United States, Mexico NAFTA established free trade area –All three nations pledge to promote economic growth through tariff reductions and expanded trade and investment –No common external tariffs –Restrictions on labor and other movements remain U.S.-Mexico Border Crossing

©2011 Pearson Education, Inc. publishing as Prentice Hall 3-19 NAFTA Income and Population

©2011 Pearson Education, Inc. publishing as Prentice Hall 3-20 Asia-Pacific: The Association of Southeast Asian Nations (ASEAN) Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam Trading partners U.S., EU, China Geographically close; historically divided “ASEAN plus six” (Japan, China, Korea, Australia, New Zealand, India) working towards an economic community

©2011 Pearson Education, Inc. publishing as Prentice Hall 3-21 ASEAN

©2011 Pearson Education, Inc. publishing as Prentice Hall 3-22 Singapore World’s 2 nd largest container port 2 nd highest standard of living in the region behind Japan 4.2 million people 93% literacy rate Over 3,000 companies Crime is nearly nonexistent

©2011 Pearson Education, Inc. publishing as Prentice Hall 3-23 Customs Union Evolution of Free Trade Area Includes the elimination of internal barriers to trade (as in FTA) AND establishes common external barriers to trade Examples: The EU and Turkey, the Andean Community, etc.

©2011 Pearson Education, Inc. publishing as Prentice Hall 3-24 Common Market Includes the elimination of internal barriers to trade (as in free trade area) AND establishes common external barriers to trade (as in customs union) AND allows for the free movement of factors of production, such as labor, capital, and information Mercosur is an example Mercosur member countries -Brazil, Argentina, Venezuela, Paraguay and Uruguay.

©2011 Pearson Education, Inc. publishing as Prentice Hall 3-25 Economic Union Includes the elimination of internal barriers to trade (as in free trade area) AND establishes common external barriers to trade (as in customs union) AND allows for the free movement of factors of production, such as labor, capital, and information (as in common market) AND coordinates and harmonizes economic and social policy within the union

©2011 Pearson Education, Inc. publishing as Prentice Hall 3-26 Economic Union Full evolution of economic union –creation of unified central bank –use of single currency –common policies on issues such as agriculture, social policy, transport, competition, mergers, taxation –requires extensive political unity –would lead to a central government in time European Union Flag

©2011 Pearson Education, Inc. publishing as Prentice Hall 3-27 European Union 27 countries 491 million people Combined GNI of $14.7 trillion Euro currency, 1999 Harmonization of laws and regulations

©2011 Pearson Education, Inc. publishing as Prentice Hall Economic integration stages (World) 3-28

©2011 Pearson Education, Inc. publishing as Prentice Hall 3-29 U.S. Goods Exports in 2008

©2011 Pearson Education, Inc. publishing as Prentice Hall 3-30 U.S. Goods Imports in 2008

©2011 Pearson Education, Inc. publishing as Prentice Hall Assignment -3 Topic for self study: Diffusion Theory in Chapter 4 Read the above topic in chapter 4 and collect more information related to the topic if possible and prepare the assignment and PowerPoint. 3-31

©2011 Pearson Education, Inc. publishing as Prentice Hall 3-32 Looking Ahead to Chapter 4 Social and Cultural Environments