Money and Business
CHAPTER NINE
Dr. Clayton Thyne
PS 235-001: World Politics
Spring 2009
Goldstein & Pevehouse,
International Relations, 8/e
Student notes version
About Money
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•
•
•
No money 
Money provides…
Money has no…
Because it depends on the willingness of
people to honor and use it, money’s value
rests on...
About Money
• Governments have the job of…
• For money to have a stable value, the
political environment must be...
– When public confidence that money today will
be exchangeable for needed goods tomorrow
erodes, the result is inflation.
• Creation of currency
– Old:
– Today:
The Currency System
• Today, each state’s currency can
be exchanged for a different state’s
currency according to an exchange
rate.
– Exchange rate (def):
• Exchange rates are important
because…
• Currency policies directly affect…
International Currency Exchange
• Most exchange rates are expressed in terms of the
world’s most important currencies:
– Thus the rate for exchanging Mexican peso for Norwegian
kroner depends on the value of each, relative to these world
currencies.
– Exchange rates that most affect the world economy are those
within the G7 states –
– China has held…
International Currency Exchange
• Changes in the value over time are
meaningful.
– Standards in currency are…
– Value of euro rises (or falls) relative to the
dollar, because…
International Currency Exchange
• Convertible versus non-convertible
currencies
– In the absence of a convertible currency, the
holder of such money has...
• E.g., foreign Soviet Union
• Inflated currencies/hyperinflation
– Hyperinflation:
– Very difficult to:
Table 9.1
International Currency Exchange
• Hard currency
–
–
–
–
–
–
Money that can be…
States maintain reserves of…
Fixed exchange rates:
Floating exchange rates:
Managed float system:
Government intervention in the currency market
• Coordinated multinational intervention
• Argentina
• China
Dark green = use the US dollar
Light green = currency pegged to the US dollar
Dark blue = use the Euro
Light blue = currency pegged to the Euro
Why Currencies Rise or Fall
• In the short term, exchange rates depend on…
• In the long term, the value tends …
– Supply:
– Demand:
– Strong currency vs. weak currency
• Strong currency:
• Weak currency:
• Overvalued currency
• Devaluation
Supply and Demand for the US Dollar
The US prints more dollars…
Supply (before)
Supply (after)
Price (p)
Demand: amount
demanded at each price
Quantity (q)
Supply and Demand for the US Dollar
The shows instability (invades Iraq, budget deficit)…
Supply: amount supplied
at each price
Price (p)
Demand (before)
Demand (after)
Quantity (q)
Central Banks
• In most industrialized countries, politicians know
they cannot trust themselves with…
• To enforce self-discipline and enhance public trust
in the value of money, these decisions are…
– Limit the amount of money printed and not allowing high
inflation.
– In the U.S., the central bank is called the...
• Sets the discount rate:
• This controls how fast money goes into the
economy:
– Too fast:
– Too slow:
The World Bank and the IMF
• As in security affairs, the main international institutions were
created near the end of WWII
• The Bretton Woods system (1944), established:
– International Bank for Reconstruction and Development (World
Bank)
•
– International Monetary Fund (IMF)
•
– Monetary regime (1944-71)
•
•
•
• Vietnam War and rise of other economies 
The World Bank and the IMF
• World Bank and IMF are the pillars of the
international financial system.
– Special Drawing Right (SDR)
• Used to…
• Cannot buy goods –
• Owned by…
State Financial Positions
• As currency rates change and state
economies grow, the overall positions of
states relative to each other shift.
National Accounts
• The IMF maintains a system of national
accounts statistics to keep track of the overall
monetary position of each state.
– State’s balance of payments is like the financial
statement of a company. It summarizes all the flows
of money in and out of the country.
• Current account:
• Capital flows:
• Changes in foreign exchange rates:
Blue: states w/ a current account surplus
Red: states w/ a current account deficit
International Debt
• Economies contain standing wealth:
– Hard currency reserve + capital goods (e.g., factories)
– Growth
•
•
• Debts
– Standing wealth of the state is…
– Even with plenty of standing wealth, debt can…
International Debt
• Why do states go into debt?
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–
–
• Fiscal policy:
• Monetary policy:
• All transactions have trade-offs, so ultimately…
The Position of the United States
• The U.S. position in the international economy has shifted over
decades.
– Post WWII:
•
– 1980s:
•
•
– 1990s:
•
– Early 2000s:
•
– Foreign deficit/surplus history
•
•
•
•
Post WWII:
Early 1980s:
End of 1980s:
Today:
• Overall:
Figure 9.1
The Position of Russia
and Eastern Europe
• States in this region face…
• Most states of the former Soviet bloc became…
– Limited foreign loans
– Deep depression
– Upward trends for Russia since the financial crisis in
1998
Table 9.2
The Position of Asia
• Japan’s growth since WWII
–
–
• Similar mistakes made by other countries of East and
Southeast Asia
– Thailand, the Philippines, Malaysia, and Indonesia…
– Stock market…
– Philippines
– China
– South Korea
Multinational Business
• Although states are the main rule makers
for currency exchange and other
international economic transactions, these
are carried out mainly by…
– Most important among these are…
Multinational Corporations
• Companies based in one state with affiliated branches or
subsidiaries operating in other states
– Worlds largest corps: http://money.cnn.com/magazines/fortune/global500/2007/
• Types of MNCs:
– Industrial corporations
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•
•
– Financial corporations
•
•
– Service corporations
•
• Role of MNCs…are they…
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–
–
Foreign Direct Investment
• MNCs do not just operate in foreign countries;
they also own capital (standing wealth) there.
– U.S. and German MNCs own some of the capital
located in Japan.
– Japanese MNCs own capital located in the United
States and Germany.
• Direct foreign investment (FDI) involves...
• Role of foreign investment
– Pros and cons
Figure 9.2
Host and Home Government Relations
• Host country:
• Home country:
• These duel interests can 
Host and Home Government Relations
• In general, an MNC cannot...
• In theory, an MNC operates in…
• Conflicts may arise
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–
Host and Home Government Relations
• Conflicts with home governments
–
–
• Security
–
• Impact on…