Theories of international trade
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    Theories of international trade Theories of international trade Document Transcript

    • Theories of international trade • theory of mercantilism • theory of absolute advantage • theory of comparative advantage • factor endowment theory • theory of international product life cycle • theory of competitive advantageEPRG concept • ethnocentric orientation • polycentric orientation • regiocentric orientation • geocentric orientation • Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS)AdpSpecial Drawing Right (SDR)Emic vs. Etic dilemmaEou Were launching a college campus program in Pune and are looking for Wikipedia CampusAmbassadors. Click here to find out more! Special Drawing RightsFrom Wikipedia, the free encyclopedia
    • Jump to: navigation, searchThe Special Drawing Right (SDR) is a monetary unit of international reserve assets defined andmaintained by the International Monetary Fund (IMF). The unit does not represent a currency,but represents a potential claim on the currencies of the IMF members for which it may beexchanged.[1] Allocations of Special Drawing Rights to IMF members are backed by a fundpooled by contributing nations, and they obtain their reserve asset power from the commitmentsof the IMF member states to hold and honor them for payment of balances.Special Drawing Rights were created in 1969 in support of the Bretton Woods system of fixedexchange rates to alleviate the shortage of U.S. dollar and gold reserves in the expansion ofinternational trade.[1] The SDR is defined as a weighted sum of contributions of four majorcurrencies, the euro, the US dollar, the British pound, and the Japanese yen, and is reevaluatedand adjusted every five years, and computed daily in terms of equivalent United States dollars.The IMF uses SDRs for its monetary unit of account. SDRs are denoted with the ISO 4217currency code XDR.Special Drawing Rights are allocated to member states as a low cost alternative to debt financingfor building reserves. Such allocations provide an unconditional liquidity for SDRs. As ofSeptember 2009, total SDR allocations amount to SDR 204 billion.[1] Special Drawing Rightscarry an interest rate that is computed weekly by the IMF. It is paid or received quarterly by themembers for deviations of their SDR holdings from their SDR allocations.Contents[hide] • 1 Creation and function • 2 Definition • 3 Interest rate • 4 Allocations • 5 Exchange • 6 Other uses o 6.1 Banking and finance system support o 6.2 Reserve currency proposal • 7 Potential pitfalls as a reserve currency • 8 See also • 9 References • 10 External links[edit] Creation and function
    • Special Drawing Rights were created by the IMF in 1969, intended to be an asset held in foreignexchange reserves under the Bretton Woods system of fixed exchange rates.SDRs were intended to replace gold and silver in large international transactions and provide acost-free alternative to member states for building reserves. Under the Bretton Woods system,the reserves of gold and U.S. dollars proved too limited to support the growth of internationaltrade and exchange. Thus, SDRs were initially credits that nations with balance of tradesurpluses can draw upon from nations with deficits. However, the creators of the new reserveasset engaged in long-standing disagreements over the role of this asset, whether it was a form ofmoney (paper gold) or credit.[2] This resulted in the naming of the asset in a neutral, anodynemanner. Member nations receiving SDR allocations were expected by the reconstitutionprovision of the SDR articles to hold or, if expended, rebuild their SDR allocations. Therefore,the SDR had initially the character of credit or a debt security. However, as the reconstitutionprovisions were dropped in 1981, the function of the SDR assumed the character of money.[2]As the SDR is used as a unit of account by the IMF and several other international organizations,it is sometimes referred to as a quasi currency.[3]A few countries peg their currencies against SDRs, and it is also used to denominate someprivate international financial instruments. For example, the Warsaw convention, whichregulates liability for international carriage of persons, luggage or goods by air, uses SDRs tovalue the maximum liability of the carrier.In the eurozone, the euro is displacing the SDR as a basis to set values of various currencies,including Latvian lats. This is a result of the ERM II convergence criteria which now apply tostates entering the European Union.In Japan, JETRO and others are using the SDR to calculate official development assistance(ODA) aid.After the collapse of the Bretton Woods system in the early 1970s, the SDRs has taken on a farless important role.[4]The SDR was suggested as a solution to the Triffin dilemma,[2] which showed a dichotomybetween sufficient market liquidity and confidence in the continuing value of the US dollar.[2]The SDR would be an asset that had sufficient liquidity to support a workable foreign exchangereserves system.[citation needed]The Triffin dilemma suggested that a well-functioning system would require liquidity, andliquidity would demand many US dollars--the US was the worlds reserve center in 1960, thetime of Triffins analysis--and the deficit necessary for there to be many dollars.[2] This deficitwould eventually devalue the dollar,[2] and in fact prior to the early 1970s the US was reluctant torun such a deficit.[5][edit] Definition
    • In 1969 one SDR was initially defined as having a value of 0.888671grams of gold, the value ofone US dollar at that time.[1] After the breakdown of the Bretton Woods system in the early1970s, the SDR was redefined in terms of a basket of currencies.[5][6] Today, this basket iscomposed of the Japanese yen, the US dollar, the British pound and the euro. Upon theintroduction of the euro in 1999, it replaced the Deutsche mark and the French franc in the SDRvaluation. The weight of each currency in the definition is determined by the IMF ExecutiveBoard in accordance with the relative importance of the currency in international trade andfinance every five years.[1] Special Drawing Rights are assigned the ISO 4217 currency codeXDR.For the period of 2006-2010, one SDR was the sum of 0.6320 US Dollars, 0.4100 euro, 18.4Japanese yen and 0.0903 pound sterling. Effective 1 January 2011, the IMF has determined thatthe four currencies that meet the selection criterion for inclusion in the SDR valuation basket willbe assigned revised weights based on their roles in international trade and reserves.[7]Due to varying exchange rates, the relative value of each currency varies continuously and thusthe SDR value fluctuates. The IMF fixes the value of one SDR in terms of US dollars daily,based on the exchange rates of the constituent currencies, as quoted at noon at the Londonmarket. If the London market is closed, New York market rates are used, and if both markets areclosed, European Central Bank reference rates are used. The latest U.S. dollar valuation of theSDR is published on the International Monetary Fund web site.[8] Composition of 1 SDR[9][nb 1] Period  USD  DEM  FRF  JPY  GBP 1981– 0.460 0.740 0.0710 0.540 (42%) 34.0 (13%) 1985 (19%) (13%) (13%) 1986– 0.527 1.020 0.0893 0.452 (42%) 33.4 (15%) 1990 (19%) (12%) (12%) 1991– 0.453 0.800 0.0812 0.572 (40%) 31.8 (17%) 1995 (21%) (11%) (11%) 1996– 0.446 0.813 0.1050 0.582 (39%) 27.2 (18%) 1998 (21%) (11%) (11%) Period  USD  EUR  JPY  GBP 0.2280 0.1239 1999– 0.5820 (21%) (11%) 0.1050 27.2 (18%) 2000 (39%) (11%) = 0.3519 (32%)[10] 2001– 0.5770 0.0984 0.4260 (29%) 21.0 (15%) 2005 (45%) (11%)
    • 2006– 0.6320 0.0903 0.4100 (34%) 18.4 (11%) 2010 (44%) (11%) 0.6600 12.1000 0.11102011–[7] 0.4230 (37.4%) (41.9%) (9.4%) (11.3%) 1. ^ relative compositions expressed in per cent are rounded.[edit] Interest rateSpecial Drawing Rights carry a weekly determined interest rate.[1] The rate is based on aweighted average of the representative short-term rates in the money markets of the basecurrencies. The SDR interest rate is paid by the IMF members on any shortfall of SDRsubscriptions below their cost-free allocation, and on non-concessional IMF loans. The IMF paysits members the interest rate on the fraction of their SDR subscriptions that is above theirallocation quota.[1][edit] AllocationsSpecial Drawing Rights are allocated to member nations by the IMF. A nations IMF quota, themaximum amount of financial resources that it is obligated to contribute to the fund, determinesits allotment of SDRs.[1] SDR allocations are officially authorized by the G-20 conferences.[1]Allocations are not made on a regular basis and have only occurred on several occasions. Theybegan in 1970 in yearly installments, creating an initial pool of SDR 9.3 billion by 1972. Thisfirst round took place due to the possibility of an insufficient amount of US Dollars, as the USwas reluctant to run the deficit necessary to supply future demand.[2]While this situation was soon reversed,[5] the situation of the dollar during the late 1970s led toanother round of allocations from 1979 to 1981 allocation.[11] This second series of installmentsbrought the total to 21.4 billion by 1981. Since then, up to the 2008 banking crisis, no newallocations took place. On 2 April 2009, the G-20 authorized the issuance of $250 billion in newSDRs to augment the foreign reserves of IMF members and quickly channel resources intoemerging economies.[12] Increases in the reserves of some emerging economies will besubstantial, e.g., South Korea’s will grow by $3.4 billion, India’s by $4.8 billion, Brazil’s by $3.5billion, Russia’s by $6.9 billion and Chinas by $7.3 billion.[13] Date Amount 1970-1972[5] SDR 9.3 billion 1979–1981 SDR 12.1 billion April 2, 2009[14] SDR 250 billion
    • September 9, 2009[sa 1] SDR 21.4 billion 1. ^ A special allocation of SDRs was issued on Sep. 9, 2009, to nations that joined the IMF after 1981 and so had never been allocated any.[14][edit] ExchangeThe IMF acts as an intermediary in the voluntary trading of Special Drawing Rights[1] and has theauthority to order nations with strong foreign exchange reserves to purchase SDRs from nationswith weak reserves.[1] But the claim to foreign currency that SDRs represent is not a claim on theIMF,[1] and it is not the IMF that pays out foreign currency in exchange for SDR.[edit] Other usesSDR are used as the unit of account for the IMF and several other international organizations,[1]such as JETRO and the Universal Postal Union.[citation needed]SDR-denominated accounts are, in general, not available from commercial banks.In some international treaties and agreements, SDR are used to value penalties, charges or prices,as is the case with the Convention on Limitation of Liability for Maritime Claims, wherepersonal liability for damages to ships are capped at SDR 330,000.[15] The Warsaw convention,the Montreal Convention and other treaties also use SDRs in this way.[citation needed]A few countries peg their currencies to the SDR.[16]It has been suggested that having holders of US dollars convert dollars into SDRs would allowdiversification away from the dollar without accelerating the decline of the value of the dollar.[17][18][edit] Banking and finance system supportThe African Development Banks own unit of account, the Units of Amount (UA), equals theSDR currency basket. The Islamic Development Bank (IsDB), uses the Islamic Dinar (ID) as acurrency. Since the inception of the IsDB, one ID has been set equal to one SDR.[edit] Reserve currency proposalIn late March 2009 Zhou Xiaochuan, governor of the Peoples Bank of China proposed using theSDR as a worldwide reserve currency in place of the dollar as a way to cope with the multitudeof problems associated with the US dollar and the euro being used as world reserve currencies.[19][20][21][22] However, independent economists point out that the SDR is unlikely to emerge as analternative reserve currency in the foreseeable future.[23] A few of them argue that Chinasproposal may be motivated by political, rather than economic, considerations.[24]
    • [edit] Potential pitfalls as a reserve currencyThere are potential pitfalls that may preclude the SDR from being a global reserve currency. TheUS dollar, the euro and the pound sterling are contained in the SDR—these currencies have beenlosing value against a larger basket of other currencies since the late 2000s recession started in2007. The SDR does not contain the Chinese yuan, Indian rupee, Australian dollar or Canadiandollar, which have important international status being widely held. No facilities exist for globalSDR banking support for individuals and businesses. The possible loss of national sovereignty ofthe nations involved is a concern.[25]Other important externalities have been occasionally cited by economists.[citation needed] China &Indias precious metal foreign exchange reserve holdings are not equivalent in size to those of theUS with respect to SDR conversion. The gulf states have precious metal reserves that arepotentially undersized. Many other nations that could move over to the SDR also have too smallprecious metal foreign exchange reserve assets.Special Drawing Rights (SDRs)March 31, 2011The SDR is an international reserve asset, created by the IMF in 1969 to supplement its membercountries official reserves. Its value is based on a basket of four key international currencies,and SDRs can be exchanged for freely usable currencies. With a general SDR allocation thattook effect on August 28 and a special allocation on September 9, 2009, the amount of SDRsincreased from SDR 21.4 billion to SDR 204 billion (equivalent to about $324.1 billion,converted using the rate of March 31, 2011).The role of the SDRThe SDR was created by the IMF in 1969 to support the Bretton Woods fixed exchange ratesystem. A country participating in this system needed official reserves—government or centralbank holdings of gold and widely accepted foreign currencies—that could be used to purchasethe domestic currency in foreign exchange markets, as required to maintain its exchange rate.But the international supply of two key reserve assets—gold and the U.S. dollar—provedinadequate for supporting the expansion of world trade and financial development that wastaking place. Therefore, the international community decided to create a new internationalreserve asset under the auspices of the IMF.However, only a few years later, the Bretton Woods system collapsed and the major currenciesshifted to a floating exchange rate regime. In addition, the growth in international capital markets
    • facilitated borrowing by creditworthy governments. Both of these developments lessened theneed for SDRs.The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on thefreely usable currencies of IMF members. Holders of SDRs can obtain these currencies inexchange for their SDRs in two ways: first, through the arrangement of voluntary exchangesbetween members; and second, by the IMF designating members with strong external positionsto purchase SDRs from members with weak external positions. In addition to its role as asupplementary reserve asset, the SDR, serves as theunit of account of the IMF and some otherinternational organizations.Basket of currencies determines the value of the SDRThe value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold—which,at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woodssystem in 1973, however, the SDR was redefined as a basket of currencies,today consisting ofthe euro, Japanese yen, pound sterling, and U.S. dollar. The U.S. dollar-equivalent of the SDR isposted dailyon the IMF’s website. It is calculated as the sum of specific amounts of the fourbasket currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each dayin the London market.The basket composition is reviewed every five years by the Executive Board, or earlier if theFund finds changed circumstances warrant an earlier review, to ensure that it reflects the relativeimportance of currencies in the world’s trading and financial systems. In the most recent review(in November 2010), the weights of the currencies in the SDR basket were revised based on thevalue of the exports of goods and services and the amount of reserves denominated in therespective currencies that were held by other members of the IMF. These changes becomeeffective on January 1, 2011. The next review will take place by 2015.The SDR interest rateThe SDR interest rate provides the basis for calculating the interest charged to members onregular (non-concessional) IMF loans, the interest paid to members on their SDR holdings andcharged on their SDR allocation, and the interest paid to members on a portion of their quotasubscriptions. The SDR interest rate is determined weekly and is based on a weighted average ofrepresentative interest rates on short-term debt in the money markets of the SDR basketcurrencies.SDR allocations to IMF membersUnder its Articles of Agreement (Article XV, Section 1, and Article XVIII), the IMF mayallocate SDRs to member countries in proportion to their IMF quotas. Such an allocationprovides each member with a costless, unconditional international reserve asset on which interestis neither earned nor paid. However, if a members SDR holdings rise above its allocation, itearns interest on the excess. Conversely, if it holds fewer SDRs than allocated, it pays interest on
    • the shortfall. The Articles of Agreement also allow for cancellations of SDRs, but this provisionhas never been used. The IMF cannot allocate SDRs to itself or to other prescribed holders.General allocations of SDRs have to be based on a long-term global need to supplementexisting reserve assets. Decisions on general allocations are made for successive basic periods ofup to five years, although general SDR allocations have been made only three times. The firstallocation was for a total amount of SDR 9.3 billion, distributed in 1970-72, and the secondallocated SDR 12.1 billion, distributed in 1979-81. These two allocations resulted in cumulativeSDR allocations of SDR 21.4 billion.To help mitigate the effects of the financial crisis, the third SDR allocation of SDR 161.2 billionwas made on August 28, 2009The Fourth Amendment to the Articles of Agreement becameeffective August 10, 2009 and was implemented September 9, 2009. It provided for a specialone-time allocation of SDRs and doubled cumulative SDR allocations to SDR 42.8 billion. The2009 general and special SDR allocations together raised total cumulative SDR allocations toabout SDR 204 billion. The purpose of the Fourth Amendment was to enable all members of theIMF to participate in the SDR system on an equitable basis and correct for the fact that countriesthat joined the IMF after 1981—more than one fifth of the current IMF membership—neverreceived an SDR allocation until 2009.Buying and selling SDRsIMF members often need to buy SDRs to discharge obligations to the IMF, or they may wish tosell SDRs in order to adjust the composition of their reserves. The IMF may act as anintermediary between members and prescribed holders to ensure that SDRs can be exchanged forfreely usable currencies. For more than two decades, the SDR market has functioned throughvoluntary trading arrangements. Under these arrangements a number of members and oneprescribed holder have volunteered to buy or sell SDRs within limits defined by their respectivearrangements. Following the 2009 SDR allocations, the number and size of the voluntaryarrangements has been expanded to ensure continued liquidity of the voluntary SDR market. Thenumber of voluntary SDR trading arrangements now stands at 32, including 19 newarrangements since the 2009 SDR allocations.In the event that there is insufficient capacity under the voluntary trading arrangements, the Fundcan activate the designation mechanism. Under this mechanism, members with sufficientlystrong external positions are designated by the Fund to buy SDRs with freely usable currenciesup to certain amounts from members with weak external positions. This arrangement serves as abackstop to guarantee the liquidity and the reserve asset character of the SDR. SDR Interest Rate Calculation
    • For the week of April 11, 2011 to April 17, 2011CurrencyCurrency amountunder Rule O-1(A)Exchange rateagainst the SDR 1(B)Interest rate 2(C)Product (A) x (B) x (C)Euro 0.4230 0.904167 1.0555 0.4037Japanese Yen 12.1000 0.00737519 0.1100 0.0098
    • Notes:(1) SDR per currency rates are based on the representative exchange rate for each currency.(2) Interest rate on the financial instrument of each component currency in the SDR basket, expressed as an equivalent annual bond yield: three-month Eurepo rate; three-month Japanese Treasury Discount bills (effective February 5, 2009, replacing the thirteen-week Japanese Government financing bills); three-month UK Treasury bills; and three-month US Treasury bills.(3) IMF Rule T-1(b) specifies that the SDR interest rate for each weekly period commencing each Monday shall be equal to the combined market interest rate as determined by the Fund. Under IMF Rule T-1(c), the combined market interest rate is the sum, as of the Friday preceding each weekly period, rounded to the two nearest decimal places, of the products that result from multiplying each yield or rate listed above by the value in terms of SDRs of the amount of the corresponding currency specified in Rule O-1. If a yield or rate is not available for a particular Friday, the calculation shall be made on the basis of the latest available yield or rate. Prepared by the IMF Finance Department DisclaimerThe International Monetary Fund makes no warranties, express or implied, regarding these tablesor the performance of this site. The Fund shall not be liable for any losses or damages incurred inconnection with this site. SDR ValuationThe currency value of the SDR is determined by summing the values in U.S. dollars, basedon market exchange rates, of a basket of major currencies (the U.S. dollar, Euro, Japaneseyen, and pound sterling). The SDR currency value is calculated daily (except on IMFholidays or whenever the IMF is closed for business) and the valuation basket is reviewedand adjusted every five years.Currency Amounts in New Special Drawing Rights (SDR) Basket Wednesday, April 13, 2011Currency Currency amount Exchange rate 1 U.S. dollar Percent change in under Rule O-1 equivalent exchange rate against U.S. dollar from previous
    • calculationEuro 0.4230 1.45080 0.613688 0.311Japanese yen 12.1000 84.06000 0.143945 0.262Pound sterling 0.1110 1.62710 0.180608 0.055U.S. dollar 0.6600 1.00000 0.660000 1.598241 U.S.$1.00 = SDR 0.625688 2 -0.149 3 SDR1 = US$ 1.59824 4 Notes:(1) The exchange rate for the Japanese yen is expressed in terms of currency units per U.S. dollar; other rates are expressed as U.S. dollars per currency unit.(2) IMF Rule O-2(a) defines the value of the U.S. dollar in terms of the SDR as the reciprocal of the sum of the equivalents in U.S. dollars of the amounts of the currencies in the SDR basket, rounded to six significant digits. Each U.S. dollar equivalent is calculated on the basis of the middle rate between the buying and selling exchange rates at noon in the London market. If the exchange rate for any currency cannot be obtained from the London Market, the rate shall be the middle rate between the buying and selling exchange rates at noon in the New York market or, if not available there, the rate shall be determined on the basis of euro reference rates published by the European Central Bank.(3) Percent change in value of one U.S. dollar in terms of SDRs from previous calculation.(4) The reciprocal of the value of the U.S dollar in terms of the SDR, rounded to six significant digits. Prepared by the IMF Finance Department DisclaimerThe International Monetary Fund makes no warranties, express or implied, regarding these tablesor the performance of this site. The Fund shall not be liable for any losses or damages incurred inconnection with this site.