INTRODUCTION TO INTERNATIONAL FINANCE<br />May 17, 2011<br />
QUIZ<br />For numbers 1 and 2, identify two items from the list below which is included in the GDP of Phils.<br />Dress bo...
QUIZ<br />Use the following table to answer the following:<br />3. Nominal GDP 2008<br />4. Real GDP 2008<br />5. Real GDP...
MACROECONOMICS<br />Study of Economics in the aggregate level<br />Aggregate  add up everything<br />P – general price le...
NATIONAL INCOME ACCOUNTING<br />Gross Domestic Product<br />Gross National Product<br />Net Domestic Product<br />
GROSS DOMESTIC PRODUCT<br />Market value of all final goods and services produced in the country within a given period of ...
GROSS DOMESTIC PRODUCT<br />If not paid for, not counted (accounting)<br />Cash-in-hand payments not included<br />Interme...
GDP per capita<br />GDP/N <br />Measure of standard of living<br />
GROSS NATIONAL PRODUCT<br />GDP + factor payments from abroad paid to domestically owned factors of production (Net Factor...
NET DOMESTIC PRODUCT<br />GDP – depreciation<br />Value of production minus value of amount of capital used up in producin...
GDP MEASUREMENT<br />Expenditure Approach<br />Outgoing<br />How we use products we produce<br />Income approach<br />Inco...
INCOME APPROACH<br />Y = C + S + T<br />C = consumption<br />S = savings<br />T = tax<br />
GDP GROWTH RATE <br />GDP Growth Rate<br />
NOMINAL GDP<br />Measured in current prices<br />
NOMINAL GDP<br />Measured in current prices<br />
HOW TO COMPUTE NOMINAL GDP<br />For each good included in the GDP, multiply the quantity by the current price per unit in ...
NOMINAL GDP<br />Nominal GDP Growth Rate<br />If GDP increases, not specific whether it’s an increase in production or inf...
REAL GDP<br />Measured using constant prices (base year)<br />
REAL GDP<br />Measured using constant prices (base year)<br />
REAL GDP<br />REAL GDP Growth Rate<br />Since prices are constant, growth rate reflects an increase in production<br />
HOW TO COMPUTE REAL GDP<br />Choose a base year.<br />For each good, multiply the quantity produced for that given year by...
INFLATION<br />Rate of change of P<br />Price Level – cumulation of past inflations<br />
MEASURES OF PRICE LEVEL<br />GDP Deflator (GDPd)<br />Consumer Price Index<br />Producer Price Index<br />Chain-weighted G...
GDP DEFLATOR<br />Change in prices that has occurred between the base year and current year<br />
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 se...
HOW TO COMPUTE GDPd<br />For each year, divide the nominal GDP by the real GDP.<br />The answer is the GDPd.<br />
GDP DEFLATOR<br />Rate of change of GDPd<br />
CONSUMER PRICE INDEX<br />Cost of buying a fixed basket of goods<br />
CONSUMER PRICE INDEX<br />
HOW TO COMPUTE THE CPI<br />Choose a base year.<br />For each good included in the CPI, index the prices by dividing the g...
CONSUMER PRICE INDEX<br />
GDPd vs. CPI<br />GDPd includes all that is produced<br />CPI only includes those consumed by the average consumer<br />GD...
GDPd vs. CPI<br />GDPd differs from year to year<br />CPI has same basket of goods<br />GDPd does not reflect price of imp...
GDPd vs. CPI<br />GDPd increases at a slower pace<br />CPI more reactive to changes in price<br />Producer Price Index<br ...
Intro to the ForEx Market<br />Foreign Exchange Market – market in which individuals, firms and financial institutions buy...
Intro to the ForEx Market<br />Types:<br />End users – Banks<br />Bank – bank (bulk)<br />Bank – Central Bank (BSP)<br />
Intro to the ForEx Market<br />Daily (57%)<br />UK		$1,359B		(34%)<br />US		$664B		(17%)<br />Japan		$238B		(6%)<br />RP		...
Intro to the ForEx Market<br />USD	43%<br />EUR 	19%<br />JPY 	8%<br />GBP	7%<br />PHP	0.1%<br />		77.1%<br />
Philippine Dealing System<br />Online 9:00am-4:00pm<br />Weighted average<br />Volume<br />Clearing house at Citibank<br /...
16 Nov 2010: P46.90/$<br />Open: P46.9/$		$100 (volume)<br />Close: P47.9/$		$100 (volume)<br />					$200<br />Always look...
www.pdex.com<br />
Example:<br />P46.5/$			$200M<br />P44.0/$			$1<br />AVERAGE = P45.25/$<br />WEIGHTED AVERAGE = P46.50/$<br />(P46.5)(200,...
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’r...
BID/OFFER<br />
Currency Arbitrage<br />Buy low, sell high<br />Make money by shuffling money<br />
RULES<br />Each trader deposits PHP and USD in Citibank (clearing house)<br />Impaired Capital<br />Each trader can only b...
RULES<br />Example:<br />Bank A		$50M, $100M (20%)<br />Bank B		$50M, $40M	 (20%)<br />
2% - 1% - 1% bands<br />If exchange rate reaches +/- 2%, trading stops for two hours<br />Someone might be speculating/pan...
FOREX SUPPLY AND DEMAND<br />Exchange rate – price of domestic currency per unit of foreign currency<br />Phil – US: P/$<b...
FOREX SUPPLY AND DEMAND<br />Flexible/floating exchange rate<br />Exchange rate that is market determined<br />Depreciatio...
FOREX SUPPLY AND DEMAND<br />Appreciation – market determined decrease of P price of foreign currency<br />Ex: P46.7/$  P...
FOREX SUPPLY AND DEMAND<br />Fixed Exchange Rate <br />Exchange rate that is artificially determined<br />Devaluation – no...
FOREX SUPPLY AND DEMAND<br />Revaluation – non-market determined decrease of P price of foreign currency<br />Demand for $...
If P/$ rate appreciates/depreciates is that because of a stronger Peso or a collapse of $?<br />Is it merely in relation t...
EFFECTIVE EXCHANGE RATE<br />Measure of overall performance of domestic currency<br />Able to figure out if Peso is weak o...
EFFECTIVE EXCHANGE RATE<br />Measure the weight/importance of each<br />Index the forex rates by dividing current year rat...
ABSOLUTE PURCHASING POWER PARITY<br />Due to the Law of One Price, commodity arbitrage makes exchange rate equal to where ...
ABSOLUTE PURCHASING POWER PARITY<br />Example #1<br />P20.00/burger in RP<br />$0.40/burger in US<br />Suppose, P40/$<br /...
ABSOLUTE PURCHASING POWER PARITY<br />As soon as everyone sees this opportunity, everyone does it<br />Pesos are exchanged...
ABSOLUTE PURCHASING POWER PARITY<br />Example #2<br />Suppose, P60/$<br />US: Need P24  $0.4/burger (A)<br />RP: Need $0....
ABSOLUTE PURCHASING POWER PARITY<br />Example #3<br />P50/$<br />US: P20$0.4 burger (A)<br />RP: $0.4P20 burger (B)<br /...
BIG MAC INDEX<br />Big Mac is the same everywhere no incentive to increase or decrease price<br />Not a good index in RP s...
ABSOLUTE PURCHASING POWER PARITY<br />Right commodity must be used, with no other factors to distort<br />Basketball<br />...
ABSOLUTE PURCHASING POWER PARITY<br />Does not take into account non-traded goods<br />Ex: Haircut<br />P50/haircut<br />$...
HOMEWORK<br />Wed: Check the price per stock of your chosen company/ies (May 17)<br />Thurs: 2 pcs, 5x8 or ½ index cards (...
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Ec102 may 17

  1. 1. INTRODUCTION TO INTERNATIONAL FINANCE<br />May 17, 2011<br />
  2. 2. 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 />
  3. 3. 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 />
  4. 4.
  5. 5. 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 />
  6. 6. NATIONAL INCOME ACCOUNTING<br />Gross Domestic Product<br />Gross National Product<br />Net Domestic Product<br />
  7. 7. 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 />
  8. 8. 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 />
  9. 9. GDP per capita<br />GDP/N <br />Measure of standard of living<br />
  10. 10.
  11. 11. 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 />
  12. 12. 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 />
  13. 13. 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 />
  14. 14. INCOME APPROACH<br />Y = C + S + T<br />C = consumption<br />S = savings<br />T = tax<br />
  15. 15. GDP GROWTH RATE <br />GDP Growth Rate<br />
  16. 16. NOMINAL GDP<br />Measured in current prices<br />
  17. 17. NOMINAL GDP<br />Measured in current prices<br />
  18. 18. 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 />
  19. 19. NOMINAL GDP<br />Nominal GDP Growth Rate<br />If GDP increases, not specific whether it’s an increase in production or inflation<br />
  20. 20. REAL GDP<br />Measured using constant prices (base year)<br />
  21. 21. REAL GDP<br />Measured using constant prices (base year)<br />
  22. 22. REAL GDP<br />REAL GDP Growth Rate<br />Since prices are constant, growth rate reflects an increase in production<br />
  23. 23. 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 />
  24. 24. INFLATION<br />Rate of change of P<br />Price Level – cumulation of past inflations<br />
  25. 25. MEASURES OF PRICE LEVEL<br />GDP Deflator (GDPd)<br />Consumer Price Index<br />Producer Price Index<br />Chain-weighted GDP<br />
  26. 26. GDP DEFLATOR<br />Change in prices that has occurred between the base year and current year<br />
  27. 27. 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 />
  28. 28. HOW TO COMPUTE GDPd<br />For each year, divide the nominal GDP by the real GDP.<br />The answer is the GDPd.<br />
  29. 29. GDP DEFLATOR<br />Rate of change of GDPd<br />
  30. 30. CONSUMER PRICE INDEX<br />Cost of buying a fixed basket of goods<br />
  31. 31. CONSUMER PRICE INDEX<br />
  32. 32. 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 />
  33. 33. CONSUMER PRICE INDEX<br />
  34. 34. 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 />
  35. 35. 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 />
  36. 36. 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 />
  37. 37. Intro to the ForEx Market<br />Foreign Exchange Market – market in which individuals, firms and financial institutions buy and sell foreign currency<br />
  38. 38. Intro to the ForEx Market<br />Types:<br />End users – Banks<br />Bank – bank (bulk)<br />Bank – Central Bank (BSP)<br />
  39. 39. Intro to the ForEx Market<br />Daily (57%)<br />UK $1,359B (34%)<br />US $664B (17%)<br />Japan $238B (6%)<br />RP $2B (0.1%)<br />
  40. 40. Intro to the ForEx Market<br />USD 43%<br />EUR 19%<br />JPY 8%<br />GBP 7%<br />PHP 0.1%<br /> 77.1%<br />
  41. 41. Philippine Dealing System<br />Online 9:00am-4:00pm<br />Weighted average<br />Volume<br />Clearing house at Citibank<br />Traders are anonymous<br />Lower is high<br />
  42. 42. 16 Nov 2010: P46.90/$<br />Open: P46.9/$ $100 (volume)<br />Close: P47.9/$ $100 (volume)<br /> $200<br />Always look at volume<br />Weighted ave today is reference rate tomorrow<br />
  43. 43. www.pdex.com<br />
  44. 44. Example:<br />P46.5/$ $200M<br />P44.0/$ $1<br />AVERAGE = P45.25/$<br />WEIGHTED AVERAGE = P46.50/$<br />(P46.5)(200,000,000/200,000,001) + (P44)(1/200,000,001)<br />
  45. 45. 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 />
  46. 46. BID/OFFER<br />
  47. 47. Currency Arbitrage<br />Buy low, sell high<br />Make money by shuffling money<br />
  48. 48. 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 />
  49. 49. RULES<br />Example:<br />Bank A $50M, $100M (20%)<br />Bank B $50M, $40M (20%)<br />
  50. 50. 2% - 1% - 1% bands<br />If exchange rate reaches +/- 2%, trading stops for two hours<br />Someone might be speculating/panic<br />Dirty flexible exchange rate<br />Creates sort of stability<br />Avoids speculation<br />
  51. 51. FOREX SUPPLY AND DEMAND<br />Exchange rate – price of domestic currency per unit of foreign currency<br />Phil – US: P/$<br />Phil – Japan: P/Y<br />
  52. 52. 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/$<br />
  53. 53. FOREX SUPPLY AND DEMAND<br />Appreciation – market determined decrease of P price of foreign currency<br />Ex: P46.7/$  P45.77/$<br />
  54. 54. 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 />
  55. 55. 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 />
  56. 56. 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 />
  57. 57. EFFECTIVE EXCHANGE RATE<br />Measure of overall performance of domestic currency<br />Able to figure out if Peso is weak or $ is strong<br />
  58. 58. 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 />
  59. 59. 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 />
  60. 60. 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 $0.5  P20 (B)<br />A: buy burgers in US, sell in RP<br />
  61. 61. ABSOLUTE PURCHASING POWER PARITY<br />As soon as everyone sees this opportunity, everyone does it<br />Pesos are exchanged for dollars to buy US burgers<br />Peso depreciates since demand for dollar goes up<br />
  62. 62. ABSOLUTE PURCHASING POWER PARITY<br />Example #2<br />Suppose, P60/$<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 />
  63. 63. ABSOLUTE PURCHASING POWER PARITY<br />Example #3<br />P50/$<br />US: P20$0.4 burger (A)<br />RP: $0.4P20 burger (B)<br />No difference<br />LAW OF ONE PRICE<br />
  64. 64. 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 />
  65. 65. ABSOLUTE PURCHASING POWER PARITY<br />Right commodity must be used, with no other factors to distort<br />Basketball<br />Ipod<br />
  66. 66. 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 />
  67. 67. 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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