• Currency was worth as much as there was gold in federal reserves of a country.
• One could convert currencies on the basis of fixed exchange rate:
Eg: 1$ - 0,25 gr of gold
1£ - 1 gr of gold
Hence 1£= 4$ and one was free to choose the currency since all of them were pegged to gold
How to keep the proportion? Example of trade between 2 countries
• If exports>imports, flow of money into the country was greater that the outflow, hence more paper money.
• In order to keep the proportion stable, needed to increase proportion of gold to the new proportion of bank money
• If exports<imports, then a country needs to cut the gold reserves and pay it to the trading partner as a deficit, hence cutting the amount of banknotes and coins in the country to keep the proportion between gold reserves and money in circulation
Then proportion changes: 100 oranges – 90$(price – 0.9$)
How does the government regulates amount of money in circulation to keep the proportion the same?
• Interest rates
• Taxation (increase to get more money, decrease to reduce its amount)
• Governmental intervention on money market (buying gov. bonds to pour more money in economy, selling them to withdraw part of money in circulation)
• Ordering banks to increase\decrease amount of “frozen money”
How is equilibrium achieved again?
• In country where E>I, there is more money but same amount of goods and services à increase in price level à goods become less attractive for foreign buyers(exports start to slowly decline), whereas imports start growing since foreign goods are less expensive than the local ones(demand for local goods decreased). Local goods become less competitive
• In country where E<I, there is less money but same amount of goods and services à decrease in price level (goods become cheaper) à hence they become more attractive for foreign buyers, so exports start increasing and imports start decreasing. Demand for local goods increases and they become more competitive
• Exports in country 1 fall, while in country 2 they rise bringing the trade back to balance without government intervention.
Advantages and benefits of Gold Standard system?
• Prices of goods and services adjust to the supply of gold, therefore long-term price stability despite short-run price volatility
• Fixed international exchange rates, therefore reducing uncertainty in international trade, hence contributing to globalisation processes
• To understand the mechanism of Gold Standard system, you’ve got to be able to derive this chain:
E<I à money outflow à lower price level à more demand for cheaper and more competitive local goods
E>I à money inflow à higher price level à less demand for more expensive and less competitive local goods.
So situations in both countries reverse many times until the balance of trade is achieved
Extension. For those ones who want to know more J
• What makes the money valuable is that it’s scarce” Peter Schiff
Economic integration and globalisation as natural phenomenon of development?
TRANSNATIONAL CORPORATION: it has its headquarters in one country and operates wholly or partially owned subsidiaries in one or more other countries. The subsidiaries report to the central headquarters. Note: some of these corporations have far more power than the nation-states across whose borders they operate!
FOREIGN DIRECT INVESTMENT: An investment made by a company or entity based in one country, into a company or entity based in another country. Foreign direct investments differ substantially from indirect investments such as portfolio flows, wherein overseas institutions invest in equities listed on a nation's stock exchange.
Emergence of Transnational Corporations
The graph below shows rapid growth of TNC’s and how the value of trade to money in circulation (T:C) have changed mainly due to the fast development and advance of TNC’s. Nowadays Transnational corporations are the main contributors to foreign trade and main source of FDI
Share of TNC in international trade and assets of the world
Recent trends in FDI
Global FDI reached a new record high in 2007, reflecting the fourth consecutive year of growth.
With inflows of $ 1,833 billion, the previous record set in 2000 was surpassed by some $400 billion. All the three major groups of economies - developed countries, developing countries and the transition economies of South-East Europe and the Commonwealth of Independent States - saw continued growth in FDI. After crisis of 2008-2009 the latest figures show positive
FDI Inflows: global and by groups of economies, 1995-2011 (billions of dollars)
The continued rise in FDI in 2011 largely reflected relatively high economic growth and strong economic performance in many parts of the world. Special attention should be paid to continuous attraction of FDI to transition economies
Increase corporate profits of parent firms provided funds to finance investment and reduced the impact of decreasing loans from the banks affected by the sub-prime credit crisis
The growth in FDI flows was also driven by cross-border M&A (mergers and acquisitions) activity, which expanded in scope across countries and sectors. The growth of cross-border M&A activity in recent years, including 2007, was due to sustained strong economic growth in most regions of the world, high corporate profits and competitive pressures that motivated TNCs to strengthen their competitiveness by acquiring foreign firms. In addition, financing conditions for debt-financed M&As were relatively favorable.
In foreign affiliates higher profits, amounting to over $1,100 billion in 2007, contributed to higher reinvested earnings, which accounted for about 30% of total FDI flows in 2007. These profits are increasingly generated in developing countries rather than in developed countries.
Countries that are main contributors of FDI
Main sources of FDI are still developed countries and each year the amount of money devoted to FDI grows continuously. However, developing and transitional economies start playing an important role in FDI flows now only as country-receivers, but also as host countries.
10 Most attractive economies-recipients of FDI
Source: UNCTAD survey
Note: This percentage is calculated as the number of times the country was mentioned, divided by the number of responding companies. Figures may add up to more than 100 % due to possible multiple responses. Number into brackets indicate last year’s ranking.
Future perspectives on FDI host countries
China is not only most attractive country to be invested in, but due to its accelerating development and growth it is believed to become one of the most active economies to invest into other countries itself
Poland and FDI
In 2010 the inflow of foreign direct investments (FDI) to Poland amounted to EUR 6.7 billion which is a decline by 32 % in comparison to the previous year. According to an initial estimate of NBP, during the first 10 months of 2011 EUR 9 billion investments came to Poland.
Main contributors of FDI into Poland
l development of technologies /communication technologies/ and it’s impact on outsourcing /non-tradable goods - services/
l stages of development of outsourcing on the example of USA:
blue collar manufacturing jobs /cheaper labor force, raw materials, lower penalties for damaging natural environment etc./
– white collar service and information technology jobs /since 1990 outsourcing of higher technology and products with high level of value added/
– primary goal for foreign outsourcng/offshoring is in general - cost reduction
average salary of IT specialists
l the term “offshoring” is sometimes used synonymously with the term “outsourcing”
l however, outsourcing means acquiring services from an outside (unaffiliated) company, which can be either another domestic company or an offshore supplier
l in contrast, a company can source offshore services from either an unaffiliated foreign company (offshore outsourcing) or by investing in a foreign affiliate (offshore in-house sourcing)
l figure on next slide demonstrates the differences between outsourcing and offshoring
Definition - offshoring vs. outsourcing: a company’s sourcing options
offshoring activities, related data sources and employment impacts
Main reason why companies outsource/offshore
l The primary driver of the move to low-cost countries sourcing remains the very large-and sustainable-cost advantage that companies can achieve
l Companies can realize savings of 20 to 40% in the landed costs of their products
Wages disproportions in selected countries (in years 2003 and 2009)
Hourly compensation costs in manufacturing, 2007
Source: Bureau of Labor Statistics
Average annual growth rates for manufacturing productivity, output, and hours worked, 1998 to 2008
Note: productivity is defined as real output per hour worked
Source: Bureau of Labor Statistics
Seven key criteria can help companies determine which products to outsource to low-cost countries and which to keep at home
It is important to model all the elements of both low-cost countries savings and additional cost
Companies are exposed to fundamental outsourcing risks and are facing go/no-go challenges as new risks emerge
Risk of leakage of information out of company that outsource its divisions /2002/
Offshored services marked size /2001 $ billions/
Outsourcing and its negative impact on employment?
l U.S bureau for labour statistics stated, that outsourcing didn’t result in great unemployment, but simply lead to restructuring of labour force à simple production got outsources, whilst ‘management’ is still done in the US.
Offshoring and jobs
Offshoring opportunities across the organization
Divisions which are offshored by various corporations
Offshoring value in the global economy /distribution of value from $1 of spend offshored 2002/
Structure of benefits for american corporations that have moved their divisions to India
Total jobs lost from US in 2004 caused by outsourcing
Total jobs lost from US in 2004 caused by outsourcing /by regions/
Changes in the structure of employment in the USA in the years 1992-2003
Geographic structure of shifting production out of US to selected countries/regions
Increased importance of outsourcing in some countries