International Finance

• 1) Foreign Exchange Risk & Political Risk
• 2) Market Imperfections
• 3) Expanded Opportunity Set

• 1980s: brought a rapid integration of international capital and financial markets (initially came from the governments of major countries that had begunn to deregulate foreign exchange and capital markets)
• 1990s: Privatization; the process by which a country divests itself of the ownership and operation of a business venture by turning it over to the free market system
• Lastly: Trade liberalization and economic integration continued to proceed at both the regional and global levels

David Ricardo states that with free international trade, it is mutually beneficial for two countries to each specialize in the production of the goods that it can produce relatively most efficiently and then trade those goods. Allows both countries to consumer more of both goods. It is not a zero-sum game, rather an increasing-sum game.

Theory claims that economic well-being is enhanced if each country's citizens produce what they have a comparative advantage in producing relative to the citizens of other countries, and then trade products. Underlying the theory are assumptions of free trade between nations and that the factors of production (land, buildings, labor, technology, and capital) are relatively immobile. **Comparative Advantage will not realistically describe international trade**

A multinational corporation can be defined as a business firm incorporated in one country that has production and sales operations in several other countries (would want to establish international banking relationships, place short-term funds in several currency denominations, and to manage foreign exchange risk)

Many companies have invested heavily in Mexico, temporarily causing unemployment in the United States, though were generally hired by other industries and offered higher wages. If the unemployment rate is quite low in the U.S., then Mexico would be experiencing an economic boom.

No, especially outside the United States and possibly a few other Anglo-Saxon countries including the United Kingdom and Canada.

Foreign exchange risk is the risk of exchanging money between countries; whichever country has the largest interest rate means that funds are flowing into that country meaning they are experiencing a depreciating currency.

Political Risk is the risk of the government doing something (possibly through policy) that affects money exchange

It exists when one party can produce a good/service at a lower opportunity cost than another. The absolute cost of production does not matter, the OPPORTUNITY COST is what does.

A financial and legal framework for regulating the relationship between a company's management and its shareholders

Plays a key role in dismantling barriers to international trade, reduces import tariffs worldwide by an average of 38%, increases the proportion of duty-free products from 20% to 44%, and extends the rules of world trade.

WTO was created by GATT, and has more power than GATT. It lowers trade barriers world-wide.

It is when a country divests itself of the ownership and operation of a business venture by turning it over to the free market system (essentially a denationalization process)

In countries with emerging and transitional economies such as Korea and Russia, and where legal protection of shareholders is weak or non-existent.

The selling off of state-run enterprises to investors; seen in socialist economies in transition to market economies. It increases the efficiency of enterprise and spurs an increase in cross-border investments.

60,000 in the world

GE (1), Ford (3), GM (5), and Exxon (10)

When one country can produce more output per unit of productive input than another

• 1) Wages are determined in a national labor market
• 2) Constant Employment is a reasonable approximation
• 3) The balance of payments is not a problem

Most people do not see a national labor market; wages earned in one industry are largely determined by wages earned in another, and workers earn more by moving to the industry in which they have a comparative advantage

Unemployment is constantly a concern of economic policy; non-economists think policies will create jobs, reality is that the Central Banks and Federal Reserve try to stabalize employment around a minimal average.

Trade imbalances are self correcting; a surplus country will acquire money, leading to rising prices that price its goods out of world markets, while a deficit country will correspondinly find its goods increasingly competitively priced

**The trade balance is equal to the difference between savings and investments**

Legal restrictions, excessive transaction and transportation costs, information asymmetry, and discriminatory taxation

They can play a role in MNC's locating overseas production and restrict the extent to which investors diversify their portfolios.