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INTRODUCTION TO INTERNATIONAL FINANCE<br />May 17, 2011<br />
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QUIZ<br />For numbers 1 and 2, identify two items from the list below which is included in the GDP of Phils.<br />Dress bought online from F21<br />Pre-loved bag sold online<br />Bag of sugar used by Starbucks<br />Shoes made by locals in Marikina<br />UAAP tickets sold by scalpers<br />
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QUIZ<br />Use the following table to answer the following:<br />3. Nominal GDP 2008<br />4. Real GDP 2008<br />5. Real GDP growth rate 2008<br />BONUS: Peso-dollar exchange rate as of May 16, 2011<br />
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MACROECONOMICS<br />Study of Economics in the aggregate level<br />Aggregate add up everything<br />P – general price level<br />Q – National output (Y)<br />π – inflation (change in P)<br />AS and AD<br />
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NATIONAL INCOME ACCOUNTING<br />Gross Domestic Product<br />Gross National Product<br />Net Domestic Product<br />
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GROSS DOMESTIC PRODUCT<br />Market value of all final goods and services produced in the country within a given period of time<br />Measures the size of the economy and amount of economic activity<br />Everything produced in the economy <br />Excludes black market<br />
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GROSS DOMESTIC PRODUCT<br />If not paid for, not counted (accounting)<br />Cash-in-hand payments not included<br />Intermediate goods – inputs are not included<br />If not used immediately and stored for future use, then it is included as inventory<br />Spatial and time limit<br />
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GDP per capita<br />GDP/N <br />Measure of standard of living<br />
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GROSS NATIONAL PRODUCT<br />GDP + factor payments from abroad paid to domestically owned factors of production (Net Factor Income)<br />NFI = income remitted in – income remitted out<br />Gawa Ng Pilipino<br />
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NET DOMESTIC PRODUCT<br />GDP – depreciation<br />Value of production minus value of amount of capital used up in producing that output<br />Best measure but impossible to compute<br />
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GDP MEASUREMENT<br />Expenditure Approach<br />Outgoing<br />How we use products we produce<br />Income approach<br />Incoming<br />Income must equal expenditure<br />
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INCOME APPROACH<br />Y = C + S + T<br />C = consumption<br />S = savings<br />T = tax<br />
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NOMINAL GDP<br />Measured in current prices<br />
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NOMINAL GDP<br />Measured in current prices<br />
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HOW TO COMPUTE NOMINAL GDP<br />For each good included in the GDP, multiply the quantity by the current price per unit in the given year<br />Add up for all the goods<br />Sum is the GDP for that year<br />
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NOMINAL GDP<br />Nominal GDP Growth Rate<br />If GDP increases, not specific whether it’s an increase in production or inflation<br />
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REAL GDP<br />Measured using constant prices (base year)<br />
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REAL GDP<br />Measured using constant prices (base year)<br />
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REAL GDP<br />REAL GDP Growth Rate<br />Since prices are constant, growth rate reflects an increase in production<br />
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HOW TO COMPUTE REAL GDP<br />Choose a base year.<br />For each good, multiply the quantity produced for that given year by the price of the base year.<br />Add up. Sum is the real GDP for the given year.<br />
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INFLATION<br />Rate of change of P<br />Price Level – cumulation of past inflations<br />
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GDP DEFLATOR<br />Change in prices that has occurred between the base year and current year<br />
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GDP DEFLATOR<br />What was worth P100 in 2007 is worth P109 in 2008<br />In 2008, if you want to buy the same goods and services, you need to pay P109. Back in 2007, you only paid P100 for it.<br />
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HOW TO COMPUTE GDPd<br />For each year, divide the nominal GDP by the real GDP.<br />The answer is the GDPd.<br />
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GDP DEFLATOR<br />Rate of change of GDPd<br />
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CONSUMER PRICE INDEX<br />Cost of buying a fixed basket of goods<br />
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HOW TO COMPUTE THE CPI<br />Choose a base year.<br />For each good included in the CPI, index the prices by dividing the given price by the price of the base year.<br />Assign weights to each good.<br />For each good, multiply its index by its assigned weight.<br />Sum it up and the total is the CPI for that year.<br />
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GDPd vs. CPI<br />GDPd includes all that is produced<br />CPI only includes those consumed by the average consumer<br />GDP better measure for forecasting<br />CPI better measure of standard of living (Dev Eco)<br />
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GDPd vs. CPI<br />GDPd differs from year to year<br />CPI has same basket of goods<br />GDPd does not reflect price of imports<br />CPI reflects price of important imports<br />
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GDPd vs. CPI<br />GDPd increases at a slower pace<br />CPI more reactive to changes in price<br />Producer Price Index<br />Same as CPI but basket of goods for producers<br />
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Intro to the ForEx Market<br />Foreign Exchange Market – market in which individuals, firms and financial institutions buy and sell foreign currency<br />
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Intro to the ForEx Market<br />Types:<br />End users – Banks<br />Bank – bank (bulk)<br />Bank – Central Bank (BSP)<br />
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Intro to the ForEx Market<br />USD 43%<br />EUR 19%<br />JPY 8%<br />GBP 7%<br />PHP 0.1%<br /> 77.1%<br />
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Philippine Dealing System<br />Online 9:00am-4:00pm<br />Weighted average<br />Volume<br />Clearing house at Citibank<br />Traders are anonymous<br />Lower is high<br />
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16 Nov 2010: P46.90/$<br />Open: P46.9/$ $100 (volume)<br />Close: P47.9/$ $100 (volume)<br /> $200<br />Always look at volume<br />Weighted ave today is reference rate tomorrow<br />
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BID/OFFER<br />Each trader places a bid/offer<br />Bid – how much you’re willing to pay for $1<br />Offer – how much you’re willing to sell $1<br />
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RULES<br />Each trader deposits PHP and USD in Citibank (clearing house)<br />Impaired Capital<br />Each trader can only buy/sell a maximum of minimum, either ($50M or 20% of impaired capital)<br />
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RULES<br />Example:<br />Bank A $50M, $100M (20%)<br />Bank B $50M, $40M (20%)<br />
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2% - 1% - 1% bands<br />If exchange rate reaches +/- 2%, trading stops for two hours<br />Someone might be speculating/panic<br />Dirty flexible exchange rate<br />Creates sort of stability<br />Avoids speculation<br />
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FOREX SUPPLY AND DEMAND<br />Exchange rate – price of domestic currency per unit of foreign currency<br />Phil – US: P/$<br />Phil – Japan: P/Y<br />
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FOREX SUPPLY AND DEMAND<br />Flexible/floating exchange rate<br />Exchange rate that is market determined<br />Depreciation – market determined increase of P price of foreign currency<br />P46.7/$ P47.63/$<br />
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FOREX SUPPLY AND DEMAND<br />Appreciation – market determined decrease of P price of foreign currency<br />Ex: P46.7/$ P45.77/$<br />
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FOREX SUPPLY AND DEMAND<br />Fixed Exchange Rate <br />Exchange rate that is artificially determined<br />Devaluation – non-market determined increase of P price of foreign currency<br />
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FOREX SUPPLY AND DEMAND<br />Revaluation – non-market determined decrease of P price of foreign currency<br />Demand for $ - determined by import market<br />Supply of $ - determined by export market<br />
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If P/$ rate appreciates/depreciates is that because of a stronger Peso or a collapse of $?<br />Is it merely in relation to $, if we trade with other countries as well?<br />
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EFFECTIVE EXCHANGE RATE<br />Measure of overall performance of domestic currency<br />Able to figure out if Peso is weak or $ is strong<br />
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EFFECTIVE EXCHANGE RATE<br />Measure the weight/importance of each<br />Index the forex rates by dividing current year rate by base year rate<br />Multiply weight and index<br />If EER goes down, P appreciates<br />
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ABSOLUTE PURCHASING POWER PARITY<br />Due to the Law of One Price, commodity arbitrage makes exchange rate equal to where prices equal across countries<br />Commodity arbitrage – buy low, sell high, commodities<br />
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ABSOLUTE PURCHASING POWER PARITY<br />Example #1<br />P20.00/burger in RP<br />$0.40/burger in US<br />Suppose, P40/$<br />US: Need P16 $0.40 (A)<br />RP: Need $0.5 P20 (B)<br />A: buy burgers in US, sell in RP<br />
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ABSOLUTE PURCHASING POWER PARITY<br />As soon as everyone sees this opportunity, everyone does it<br />Pesos are exchanged for dollars to buy US burgers<br />Peso depreciates since demand for dollar goes up<br />
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ABSOLUTE PURCHASING POWER PARITY<br />Example #2<br />Suppose, P60/$<br />US: Need P24 $0.4/burger (A)<br />RP: Need $0.33 P20/burger (B)<br />Use P20 to buy burger in RP and sell in US market<br />Appreciation – supply of dollars increase ($ converted to P)<br />
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ABSOLUTE PURCHASING POWER PARITY<br />Example #3<br />P50/$<br />US: P20$0.4 burger (A)<br />RP: $0.4P20 burger (B)<br />No difference<br />LAW OF ONE PRICE<br />
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BIG MAC INDEX<br />Big Mac is the same everywhere no incentive to increase or decrease price<br />Not a good index in RP since not high demand<br />Distorted because of Jollibee<br />Should be “same” for all countries<br />
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ABSOLUTE PURCHASING POWER PARITY<br />Right commodity must be used, with no other factors to distort<br />Basketball<br />Ipod<br />
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ABSOLUTE PURCHASING POWER PARITY<br />Does not take into account non-traded goods<br />Ex: Haircut<br />P50/haircut<br />$10/haircut<br />Exchange rate: P5/$???<br />Barbers don’t go from one place to another<br />
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HOMEWORK<br />Wed: Check the price per stock of your chosen company/ies (May 17)<br />Thurs: 2 pcs, 5x8 or ½ index cards (with or without notes yet)<br />USB (clean) with video<br />CD (with names) with video<br />
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