Lecture Issues in economics today - Chapter 15

When you finish this chapter, you should: Define the key terms of economics and opportunity cost and understand how a production possibilities frontier exemplifies the trade-offs that exist in life, distinguish between increasing and constant opportunity cost and understand why each might happen in the real world, analyze an argument by thinking economically, while recognizing and avoiding logical traps.
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Lecture Issues in economics today - Chapter 15 Chapter 15 The International Monetary Fund McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Chapter Outline • BEFORE THE IMF AND ITS BIRTH • FOREIGN EXCHANGE MARKETS • TODAY’S IMF • THE ASIAN FINANCIAL CRISIS McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. The IMFs Role • The International Monetary Fund (IMF) is – a location to which member nations can go for expert economic advice. – designed to foster trade among its member. – the lender for member nations in short-term economic difficulty. – not a lender for development purposes. (This is the function of the World Bank.) McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. The IMF’s Birth • After World War II the IMF was developed (with the United Nations, the World Bank and the Global Agreement on Tariffs and Trade) to foster economic growth. • It was the brainchild of John Maynard Keynes. McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Trade Requires Currency • Trade between countries is beneficial. • International trade requires that the currency of the trading partners be exchanged. • The market where people come to trade currencies is called the foreign exchange market. – E.g. the production and export of a radio can require several currency transactions. McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Foreign Exchange Markets • The demand for a currency (say the dollar) is also the supply of the other currency (say the yen). • The supply for a currency (say the dollar) is also the demand of the other currency (say the yen). McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Modeling Foreign ExchangePrice of yen A curve which representsin dollars the willingness of those who have Yen to trade them for dollars equilibrium exchange rate A curve which represents the willingness of those who have dollars to trade them for Yen Quantity of yen McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. Who is the IMF and Where Does the Money Come From • 182 nations • The money that is loaned comes from quotas that are expressed in Special Drawing Rights (SDRs) – a made up currency of the IMF that is comprised of a weighted average of the four major currencies of the world (dollar, yen, pound and Euro.) • 75% of the quota can be paid in the countries own currency, 25% must be paid in a hard currency – currencies easily converted to U.S. Dollars or gold McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. How Decisions are Made • Voting is not one country one vote • It is roughly 100,000 SDRs of quota one vote. • This gives the US and Europe an important vote. McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. What the IMF Does • The IMF makes short term loans to countries in economic distress. • If a nation requires a short term infusion of hard currency to make it so that trade can continue, the IMF makes the loan. • A country can get its 25% hard currency contribution loaned back to it easily. McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. The Asian Financial Crisis: The Cause Part I • Large investments in Asia from the Europe and Japan. • Banks in Asia did not hedge (taking an investment position so that changes in prices or exchange rates do not alter the advisability of a business decision) their foreign exchange position. • These banks borrowed hard currency and loaned out local currency. McGrawHill/Irwin ©2002TheMcGrawHillCompanies,Inc.,AllRightsReserved. The Asian Financial Crisis: The Cause Part II • Thailand exchange rate with the dollar was not at a ...