3460.01 Notes: A.P. Palasvirta, Ph.D.. David Ricardo Factors of production Labor Fixed assets...
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Transcript of 3460.01 Notes: A.P. Palasvirta, Ph.D.. David Ricardo Factors of production Labor Fixed assets...
3460.01
Notes: A.P. Palasvirta, Ph.D.
David Ricardo Factors of production
LaborFixed assets
Buildings Land resources
Capital Ability to attract financing
Technology Intellectual capital
April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 2
Seeks lowest relative cost factorsAlberta increases taxes on gas and oil
Production migrates to Saskatchewan (lower cost)
Appendix 1ACountry A
Food cost of textiles = 1.67 in inputs Textile cost of food = 0.6 in inputs Country A specializes in textiles
Country B Food cost of textiles = 3.75 in inputs Textile cost of food = 0.2667 in inputs Country B specializes in food
April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 3
Globalization International financial system
Exchange markets Banking and money markets Bond and equity markets Derivative markets
Foreign exchange exposure transaction Economic Translation
Financial management of the multinational firm Foreign direct investment Capital structure & capital budgeting Imports, exports
April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 4
Exchange rates (linear regression)Trend
Slope of trend line of time-series regression Positive- currency depreciating
Volatility Standard error of estimate of time-series
regression Low value - low risk
Affect on real exchange rates Violation of purchasing power parity condition Something real is changing
April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 5
e tt
Exists as a function of potential change in rules (laws pertaining to business)Expropriation (Venezuela, Hugo Chavez)
Quick compensation at fair market valueWar (Iraq, Afghanistan)Protectionism
Increasing the barriers to trade Tariffs (U.S. import tariffs on Canadian lumber) Quotas (European restrictions on genetically
modify food) Subsidies (export subsidies to produce wheat,
corn) Regulatory (including labor & environmental
standards in treaties)
April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 6
Those in power make the rules redistribution of wealth and income
Monetary policy Fiscal policy Regulatory policy
Corruption Soft corruption - political contributions Hard corruption - bribes
April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 7
Inside governanceStockholders
Concerned about value maximizationBoard of directors
Subset of stockholdersHire managersStrategic decision making
Managers Tactical decisions making (strategic)
April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 8
Many buyers, many sellersNo market power, thick markets
Low or no transactions costs (taxes)Transactions costs and taxes distort
Perfect informationEliminates agency
April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 9
U.S., Canadian, British Market failures
Enron, etc.Failure of corporate governance structure
Sarbanes Oxley CEO, CFO sign off on financial statements Audit, compensation committees external Corporate officers cannot take loans from firm Test their own financial controls against fraud
April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 10
Protect shareholder rightsMajority and minority
Protect stakeholder rightsCustomers deserve good products and
reasonable pricesFirms should be good citizens
Disclosure and transparency
April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 11
other arrangements internationallyGovernment (privatized utilities) Institutions
Banks, hedge funds, insurance companiesFamily enterprises
Family conglomerates (France, South America) Consortiums
Keiretsus (Japan) chaebols (South Korea)
April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 12
China, Russia, Arab Emirates Increasingly have huge resources to spend
due to trade and/or oil (sovereign wealth funds)
UAE $875,000,000,000Norway $360 billionSingapore (GIC) $330 billionSaudi Arabia $300 billionKuwait $250 billionChina $200 billionSingapore (Temasek) $59.2 billionLibya $50 billionQuatar $50 billionAlgeria $42.6 billion
April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 13
Governments do not necessarily worry about the bottom line (maximizing profits/value)
Governments have political agenda??How much of what Russia and China do is
politically motivated Chinese exchange rate policy Russian interrupting gas supplies to Europe
Central bank holdingsU.S. Dollar denominate t-bills
China approximately $1 trillion
April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 14
Family owned conglomeratesSouth America, Asia, FranceFamilies own a diversified portfolio of real
assets Bank ownership of equity stakes
Germany, Korea Government ownership of equity stakes
Canada, China, Russia
April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 15
Concentration of powerMarkets for equities and debt are thin
Few buyers, few sellers Stock price manipulation
Lack of transparency Highly asymmetric information
Government often complicit with firmsGoods and service markets manipulated
April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 16
Equity markets ( concern Value)Analysis and trading (information)
Stock price moves on informationUp means excess demand at current priceDown means excess supply at current price
Debt markets (concern risk)Analysis and trading (information)
Debt prices move on Inflationary pressures, exchange rate
movements, central bank mutteringsRisk
April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 17
Hired gunsAccountantsLawyers
Regulators Stakeholders - Agency problems
Customers/managementManagement/laborStock holders/managementGovernment/management
April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 18
Cultural differencesCorporate governanceLegal environmentRegulatory environment
Different currenciesExchange rate riskHedging behavior
Forwards, futures, options, swaps
April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 19
Simple ratioCanadian dollar (cd) price usd
usd price of cd
http://fx.sauder.ubc.ca/etc/CADpages.pdf
April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 20
ecd
usdcd usd,
.
1 1371
1
eusd
cdusd cd,
.
0 8794
1
Complex concept Equilibrium price at which supply equals
demand
Demand for USD (by Canadians) Canadians buying American
Importing goodsBuying U.S. securities
Supply of USD (by Canadians) Canadians selling to Americans
Exporting goods Attracting U.S. based investors
April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 21
DeregulationElimination of fixed brokerage fees
U.S. 1975 England 1986
Benefits Lower transactions costs Cross border listings International financial market integration More innovation
Disadvantages More innovation
More opacity (lack of information)
04/21/233460.01 globalization notes: a.p. palasvirta, ph.d. 22
DisintegrationMortgage backed securities
Tranches of mortgages bundled for sale in secondaryh markets
Housing bubbleViral effects
BankingLack of proper capital adequacy relative to riskLack of oversight of new financial instruments
Other sectorsLack of liquidity led to failures
04/21/233460.01 globalization notes: a.p. palasvirta, ph.d. 23
ReregulationCapital adequacyErection of walls to reduce conflicts of
interest Commercial banking
Deposits insured by government Investment banking
Reporting requirements Insurance Mutual funds
Increasing oversight (Madoff)
04/21/233460.01 globalization notes: a.p. palasvirta, ph.d. 24
1999Austria,Belgium, Finland,France, Germany,
Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spains
BenefitsReduce exposureFinancial market convergence
Lower costs of borrowing More depth, more liquidity
Disadvantages12 different fiscal policies
04/21/233460.01 globalization notes: a.p. palasvirta, ph.d. 25
ImplosionPIIGS (Portugal, Italy, Ireland, Greece,
Spain) Running large deficits (more than 10% of GDP) Increasing large government debtt (around
100% of GDP)No exchange rate depreciation to bail them
out to make their products cheaper Retrenchment
Germany & France bailing out the PIIGSNew regulations and enforcement
04/21/233460.01 globalization notes: a.p. palasvirta, ph.d. 26
Trade treatiesThe European UnionNorth American Free Trade Association
(NAFTA)World Trade Organization (WTO)
Doho round trying to liberalize agricultural trade and intellectual property
RetrenchmentProtectionism
Labor regulations Environmental regulations
04/21/233460.01 globalization notes: a.p. palasvirta, ph.d. 27
Business firms operating in multiple countries Inputs (raw materials, intermediate goods
(engines)Financing alternativesLabor & capital (outsourcing)Product markets
AdvantagesEconomics of scale & scopePurchasing power with suppliersResearch & development
04/21/233460.01 globalization notes: a.p. palasvirta, ph.d. 28
DisadvantagesLoss of control
Different culturesCountry & corporate
DistanceHarder to supervise
Cost control Quality control
Transportation costsDifferent regulatory, political environmentsExpropriation
04/21/233460.01 globalization notes: a.p. palasvirta, ph.d. 29