1.

Globalization and the Anti-Globalization Movement

Globalisation
Globalization is a process of interaction and integration among the people, companies, and governments
of different nations, a process driven by international trade and investment and aided by information
technology. This process has effects on the environment, on culture, on political systems, on economic
development and prosperity, and on human physical well-being in societies around the world.
Advances in information technology, in particular, have dramatically transformed economic life.
Information technologies have given all sorts of individual economic actorsconsumers, investors,
businessesvaluable new tools for identifying and pursuing economic opportunities, including faster and
more informed analyses of economic trends around the world, easy transfers of assets, and collaboration
with far-flung partners.
Globalization is deeply controversial, however. Proponents of globalization argue that it allows poor
countries and their citizens to develop economically and raise their standards of living, while opponents
of globalization claim that international free market has benefited multinational corporations in the
Western world at the expense of local enterprises, local cultures, and common people.

Anti-globalisation Movement
Resistance to globalization has therefore taken shape. The anti-globalization movement, or counterglobalisation movement is a social movement critical of the globalization of corporate capitalism.
Participants base their criticisms on a number of related ideas. What is shared is that participants oppose
what they see as large multi-national corporations having unregulated political power, exercised
through trade agreements and deregulated financial markets. Specifically, corporations are accused of
seeking to maximize profit at the expense of work safety conditions and standards, labour hiring and
compensation standards, environmental conservation principles, and the integrity of national legislative
authority, independence and sovereignty.
People opposing globalization believe that international agreements and global financial institutions, such
as the International Monetary Fund (IMF) and the World Trade Organization, undermine local decisionmaking. Corporations that use these institutions to support their own corporate and financial interests, can
exercise privileges that individuals and small businesses cannot, including the ability to:
move freely across borders,
extract desired natural resources, and
use a wide variety of human resources.
In my oppinion, ideas of globalization in theory are very good and could benefit society in general.
However, due to the IMF and WTO which do benefit rich countries over the poor one, globalization
causes these antiglobalization movement which in my oppinion are right when criticizing IMF and WTO.

2. System of national accounts

Economists use national income accounting and balance of payments accounting to describe a countrys
level of production and international transactions.
National income accounting records all the expenditures that contribute to a countrys output and incomebalance of payments accounting shows changes in a countrys indebtedness and international
competitiveness, connection between foreign transactions and national money supply
National income accounts measure production, expenditures, and national income
the main categories are GNP,GDP and national income
GNP is the value of all finalgoods and services produced by a nations factors of production in a given
period of time

=GNPdepreciation of capitalindirect business taxes

National income is the income earned by a nations factors of production
GDP measures the value of all final goods and services that are produces within a country in a given
period of time

GDP=GNPfactor payments foreigncountries +factor payments foreign countries

In a closed economy:
National income is equal to value of production (expenditure of production)

Y =C + I +G
C- private consumption
I- private sector/ business investment
G- government spending
In an open economy:
National income is equal to the value of production (expendture of production)

Y =C +I +G+ ( EX )
Y =C + I +G+CA CA- current account balance or net export;
Current account is balanced when export is equal to imports, production is equal to absorption and
national saving is equal to investment
Balance of payments is a record of all economic transactions between the residents of one economy
Types of transactions:

Credit and debit

Current and capital

Unilateral (one-side) and bilateral

Private and official
Autonomous and compensatory

Each transaction is either debit or credit and because of double entry accounting each transaction has a
pair so the overall balance of payments has to be equal to zero
Deficit or surplus can occur when one or more of the subaccounts of balance of payments are not in
equilibrium
credit transactions are: exports of goods, exports of services, income from investment abroad, one side
transactions/ unilateral transfers from abroad, and investment from abroad
debit transactions are: imports of goods, imports of services, income from foreign investment in a
country, one side transactions/ unilateral transactions from a country, and investment by home country to
residents abroad
the balance of payments consists of the capital, current and financial accounts
current account is the goods and services balance which shows the trade and services balances and net
income from investment
unilateral transfers in the current account include private transfer payments and governmental transfers
the capital account records mostly nonmarket and nonfinancial asset transfers
the financial account represents investment flows and changes of the international reserves
It includes transactions of ownership over financial assets and liabilities between residents and nonresidents. It includes private- sector and official capital transactions and statistical discrepancy
There are also private sector capital transactions which show capital inflows and outflows, official reserve
assets which consist of the nations financial assets held by the central bank, and statistical discrepancy
which includes errors and omissions

3. The Concept and Structure of the Balance of Payments

Balance of payments is a record of all economic transactions between the residents of one country and the
rest of the world over the period of one calendar year or over a shorter period.
International transactions include the exchange of goods, services, or assets. There exist the following
types of transactions:
Credit and Debit
Current and Capital
Unilateral and Bilateral
Private and Official
Autonomous and Compensatory
Each transaction is either a debit or a credit transaction. There exists the double-entry accounting: each
credit transaction has a balancing (paired) debit transaction, and vice versa, so the overall balance of
payments is technically always balanced.

Credit transactions result in the receipt of payment from abroad (from foreigners). They form the supply
of foreign currencies. They are:
Exports of goods and services
Income from investment abroad (by residents)
One-side transactions from abroad
Investment from abroad
Debit transactions lead to payments to foreigners. They form the demand for foreign currencies. They are:

Imports of goods and services

Income from foreign investment in a country (by non-residents)
One-side transactions from a country
Investment by home country residents abroad

Structure of the Balance of Payments:

Current Account:
-

Goods and services balance (export and import of goods and services)
o Trade balance
o Services balance
Net income from investment
Unilateral transfers:
o Private transfer payments
o Government transfers

Capital Account:
It records mostly nonmarket, nonfinancial asset transfers. Capital transfers consist of transfers of
ownership of fixed (capital) assets, transfers of funds linked to acquisition or disposal of fixed assets, debt
forgiveness, migrants transfers in kind and estimated amount of remittances from abroad in the form of
capital goods, copyrights, etc.
Financial Account:
A financial account represents investment flows and changes of the international reserves. It includes
transactions of ownership over financial assets and liabilities between residents and non-residents. It
includes private-sector and official capital transactions and statistical discrepancy.
-

Inflows are recorded as credit (plus sign) transactions and outflows are recorded as debit (minus
sign) transactions.

Private sector capital transactions show capital inflows and outflows. There are two types:

Portfolio investment (securities, bank loans, deposits)

Direct investment (when residents of one country acquire a controlling interest stock ownership
of 10% or more in a business enterprise in another country).

Official reserve assets consist of a nations financial assets held by the central bank. They involve the
following:

Monetary gold stock

Special drawing rights (SDR)

Reserve position in the IMF
Convertible foreign currencies

If a country is running down its reserves or borrowing from foreign central banks, it has a deficit, in the
opposite case, it has a surplus.
A statistical discrepancy includes errors and omissions. Totals of credit and debit transactions do not
match as it is expected; there is always a residual because of different reasons (information for
transactions comes from different sources, large number of transactions fail to get recorded, etc.). The
most frequent source of error are short-term capital transactions.

4. Exchange rate and foreign exchange market

Exchange rate is the price of one countrys currency in terms of another countrys currency
If the foreign exchange rate increase, we have to pay more units of the domestic currency fir a unit the
given foreign currency. Conversely, if the foreign exchange rate decreases, we have to pay fewer units of
the domestic currency for a unit of the given foreign currency.
The exchange rate can be quoted in two ways:
Direct quotation- the price of a foreign currency in terms of the domestic currency and indirect quotation
the price of the domestic currency in terms of a foreign currency
Exchange rates play a central role in international trade, because they enable us to compare the prices of
goods and services produced in different countries and conversion of value. Exchange rate is an important
factor for investment decision making process and it serves as an instrument for adjustment
Exchange rates are determined in the foreign exchange market by market forces both supply and
demand conditions. The real (equilibrium) exchange rate is the exchange rate that equalizes supply and
demand in the foreign exchange market; it is the rate that clears the market

Supply refers to the amount of foreign exchange that will be offered to the market at various exchange
rates, all other factors held constant and is positive because as supply increases when the exchange rate
increases.

Supply side results from credit activity and demand side results from debit activity, that is connection
between balance of payments and foreign exchange rate.
Demand is negative because it varies inversely with the exchange rate
Depreciation a real decrease in a currency value; decreasing of its internal value
Appreciation a real increase in a currency value; increasing of its internal value
Devaluation an official reduction of a currency value by a formal act of monetary authorities
Revaluation an official increasing of a currency value by a formal act of monetary authorities
Depreciation and devaluation cause an increase in export while appreciation and revaluation cause and
increase in import
Quotation

Direct
quotation

Indirect quotation

Change in
exchange rate

Apreciation/

Depreciation/

Revaluation

Devaluation

ER

Foreign currency

domestic currency

ER

domestic currency

foreign currency

1/ER

Domesticcurrency

foreign currency

1/ER

foreign currency

domestic currency

Overvalued currency:
Official value (par value) > purchasing power
Makes import cheaper, stimulates import and consumption; works inflationary
Method of correction devaluation
Undervalued currency: official value (par value) < purchasing power
Makes domestic goods cheaper for foreigners thus stimulates export and allocation of resources towards
export industries
Method of correction revaluation
Par value is relation of the domestic currency to some conventional common denominator such as gold or
dollar. Purchasing power parity is value of a currency expressed in the quantity of goods that could be
bought for a unit of the currency. Shortly, purchasing power parity is internal while par value is external
value of currency.

5. Exchange rate systems/regimes

Exchange rate system is a system of rules for determination a value of one currency in relation with other
currencies.
Fixed exchange rate
Fixed/pegged exchange rate the value of one countrys currency expressed in the value of another
countrys currency in a fixed amount.
Official exchange rate (par value) is defined by the government (the central bank). The domestic currency
is pegged to a single convertible currency or a currency basket (exchange rate anchor):gold,
key currency (dollar, euro, yen etc.),a basket of currencies (for example, special drawing rights SDR, a
basket of five currencies established by the IMF).
Today fixed exchange rates are usually applied in small and developing countries.
Stabilization of exchange rate means an impact on supply and demand at FOREX market.
Two components:
Par value is relation of the domestic currency to some conventional common denominator such as gold or
dollar. Purchasing power parity is value of a currency expressed in the quantity of goods that could be
bought for a unit of the currency
Spomenut overvaluation I undervaluation
How to keep exchange rate fixed?

passive stabilization gold standard;

active stabilization Bretton-Woods system and modern monetary systems;

Passive exchange rate stabilization:
values of most national currencies were expressed in gold;
conversion of currencies into gold at a fixed rate;
Active stabilization of exchange rates:
The central bank sells foreign currencies from its international reserves and fulfills gap between supply
and demand for foreign exchange.
Advantages of fixed exchange rate:
stability (reduced foreign exchange risk);
predictability;
Currency board arrangement:
the strongest form of a fixed exchange rate;
national currency convertible into a foreign anchor currency at a fixed exchange rate set by law;
Dollarization/Euroization:
Full or official dollarization means elimination of a national currency and its complete
replacement by the foreign currency.
Floating exchange rate

Exchange rates are determinated in the foreign exchange market by market forces both supply and
demand conditions. Supply is derived from credit transactions and demand is derived from debit
transactions.
An economy adjusts by variation of exchange rate maintaining stability of prices and income. Exhange
rate is always real, the domestic currency cannot be either overvaluated or undervaluated.
Spomenut current account deficit pa sve dalje kako ide
J-curve

J-curve indicates changes in trade balance or in current account after currency

devaluation/depreciation.
Time lag a relatively long period from the moment of a change in exchange rate until the
moment of its effect on trade balance.

Advantages for floating exchange rate:

more freedom in creating of monetary policy;
always balanced balance of payment;
always real exchange rate;
no need for large international reserves;
Combined exchange rate systems
Crawling peg system:
margins of daily fluctuations: 2-3%;
small and frequent changes in the par value several times a year.
Exchange rates with crawling band:
intervention of CB to hold the rate within limits
Exchange rates with monitoring band:
no intervention of the CB to hold the rate within the band;
Managed flexible exchange rates:
an attempt to combine two main exchange rates systems in order to to take advantage of the best
features of both of them;
Multiple exchange rates system
In this system there is an officially set exchange rate and a second parallel rate that is freely determined
by the market.
Main criteriafor choosing an appropriate exchange rate system are country characteristics, as follows:
size and openness of the economy;
inflation rate;
degree of financial development (development of financial markets);
labor market flexibility

6. The Theory of Exchange Rate Determination

Theoretical approaches to exchange-rate determination:
1

Balance-of-payments approach

Exchange rate is determined by supply and demand in a forex market.

supply of foreign exchange results from credit (active) transactions of the balance of
payments, such as: export of goods and services, unilateral transfers from abroad, income
from investment, inflow of foreign capital;
demand for foreign exchange is derived from debit (passive) transactions of the balance
of payments, such as: import of goods and services, unilateral transfers from a country,
income of foreign investment, outflow of capital;
exchange rates depend on current account balance:
deficit demand > supply of foreign exchange
exchange rate (depreciation of domestic currency)
surplus supply > demand for foreign exchange
exchange rate (appreciation of domestic currency)

Theory of purchasing power parity

(See question 7)

Monetary approach
Monetary approach originates from the quantitative theory of money (David Hume, 1752).
The key determinants of exchange rate are changes in money market.
changes in money market (supply or demand) change of exchange rate
Model with one country (one currency):
exchange rate depends on domestic money supply and demand;
two versions of the model:
model under fixed exchange rates;
model under flexible exchange rates;
Model with two countries (two currencies):

exchange rate depends on domestic and foreign money supply and demand;
Equilibrium in money market:
Ms = Md
Disequilibrium in money market:
different factors changes in Ms and Md changes of exchange rate
Key question: Which factors affect Ms and Md?
Money supply:
under fixed exchange-rate system: money supply is exogenous variable (depending on
monetary reserves);

under flexible exchange-rate system: money supply is endogenous variable (depending

on central bank activities:;
Factors affecting money supply:
money multiplier (m) assumption: m=const;
domestic credit (D) domestic component of MB;
monetary reserves (MR) international component of MB;
s
M = m MB
MB = D + MR
m money multiplier;
MB monetary basis (primary money);
D domestic credit i.e. domestic component of MB;
MR monetary reserves i.e. International component of MB;

Monetary approach under fixed exchange rates SUMMARY:

imports , deficit BP, MR , Ms
D , MB , MS
Foreign price , imports , surplus BP, Income ,MD MS,
Foreign price , Income , Md, Ms
Monetary approach under flexible exchange rates SUMMARY:
Changes of money supply:
D Ms ER
D MD ER
MS increases leads to more credits increase in domestic consumption and income
import growth increase in demand for foreign exchange exchange rate
growth
Changes of money demand:
r Md/P ER
Price foreign Md/P ER
Y Md/P ER
4

Asset-markets (portfolio balance) approach

the key determinants of exchange rates in short run are financial transfers changes and
conditions in money market and capital market;
exchange rate is determined by process of balancing the total demand and supply of financial
assets (of which money is only one);

According to the simplest portfolio balance model:

Financial wealth = domestic money + domestic bonds + foreign bonds
W=M+B+F

Financial market equilibrium in short run means balance between supply and demand of
all three forms of assets:
Ms = M d
Bs = Bd
Fs = Fd
Disequilibrium in the financial market could be caused by the following:
change of money supply or demand (M), because of the central bank interventions in the forex
market or open-market operations;
change of domestic bond supply or demand (B), because of change in domestic interest reate;
change of foreign bond supply or demand (F), because of surplus/deficit of BP or change of
interest rate in the international capital market;
i appreciation of domestic currency;
if depreciation of domestic currency;

7. The Theory of Purchasing Power Parity

Theory of PPP (long run framework for determination of the exchange rate) was elaborated by
Swedish economist Gustav Cassel.
The key determinant of exchange rate is purchasing powerparity i.e. ratio between
purschasing powers of domestic and foreign currency.
Purchasing power (PP) is the value of a currency expressed in quantity of goods that could
be bought for the currency unit. It is real or internal value of the currency. Purchasing power
depends on the prices: if prices increase, PP decreases, and vice versa.
So, the key determinant of exchange rates are changes in price levels in given countries.
Theory of PPP is based on law of one price.
commodity arbitrage law of one price (equalization of prices in different markets)
Commodity arbitrage* - the practice of taking advantage of a price difference between
two or more markets (buy low and sell high).
Law of one price: A given commodity should have the same price in all markets,
expressed in terms of the same currency.
Necessary assumptions: free trade, zero transportation costs, perfectly informed
participants in the market.
Law of one price explains link between prices of goods and exchange rate.
PUSA = PUK (in US dollars) where P is price
In the long run, the exchange rate between two countries should move towards the rate that
equalizes the prices of an identical basket of goods and services in each country.
In situation of fixed exchange rates: Price difference will result in commodity arbitrage
that will last as long as it can bring profit i.e. till prices equalize at given exchange rate.

In situation of flexible exchange rates: Price difference will result in international

arbitrage that will change exchange rate; then the law of one price will be valid again.
Absolute version:

comparison of purchasing powers of foreign and domestic currencies;

ER = PPf / PP

P PP ER
Pf PPf ER
comparison of relative prices of goods:
ER = P / Pf
P ER
Pf ER

P price level (market basket) in domestic country;

Pf price level (market basket) in foreign country;
ER exchange rate (direct quotation);

The equilibrium exchange rate between two currencies is equal the ratio of the price levels
in two countries (the ratio of domestic to foreign prices of a market basket of goods and
services).
In the long run, the exchange rate between two countriesshould move towards the rate that
equalizes the prices of an identical basket of goods and services in each country.
Purchasing power parity exists if price levels in two countries are equal expressed in the
same currencies.
Due to these limitations (assumption on free trade; excluding of transportation
costs;assumption of homogeneous products) of the absolute version, the relative version of
theory of PPP is much more frequently in use.
Relative version:
The change in the exchange rate over a period of time should be proportional to the relative
change in the price levels in the two nations over the same period i.e. to the difference between
national inflation rates.
Exchange rate will stay the same, if percentual changes of prices in both countries are the same.
in developed form:
(ERt ERt-1)/ERt-1 = (Pt Pt-1)/Pt-1 - (Pft Pft-1)/ Pft-1

comparison of price indices of two countries:

ERt = ER0(CPI/CPIf)
ER0 exchange rate of the basic period;
CPI consumer price index in domestic country;

CPIf consumer price index in foreign country;

8. The Gold Standard

International monetary system is "big wheel" that allows the smooth running of economic processes in the
world and the achievement of economic goals. We had different international monetary systems
throughout history and in period from 18701914. i 1918-1931 there was gold standard.
The gold standard is a monetary system in which the currency is based on a fixed quantity of gold.
System Features:

attachment of currencies to gold

currency convertibility into gold
fixed official price of gold - the obligation of the central banks to buy and sell gold at a fixed
price;
freedom of export and import of gold;
fixed exchange rates (moving in a narrow range between the gold points);
flexibility of prices and wages

Two mechanisms for maintaining the external balance:

automatic adjustment mechanism over the price (inflow of gold is increasing prices outflow of
gold is decreasing prices;)
strict "rules of the game";

The advantages of the gold standard:

automatic rebalancing the balance of payments;

stable exchange rates;
fiscal discipline - the inability to print money adversaries for the purposes of financing the
budget deficit (excluding the sale of government bonds to private entities);
international monetary cooperation;

Disadvantages of the gold standard:

the balance of payment balance more important then economic development

inability to use monetary policy to combat unemployment
limited supply of gold
the ability of countries that are large gold producers to influence the macroeconomic policy in the
world;
in practice, the central bank did not consistently respected the rules of the game;

gold standard1870-1914
gold- exchange standard1922-1931

Gold-exchange standard:

gold and the British pound, and later the dollar;

United Kingdom and the United States - centers of the international monetary system;
absence of complete gold coverage;
"rules of the game" were not obeyed anymore

The collapse of the gold standard:

The Great Depression (1929-31.);

193ties- the period of stagnation of the world economy, economic crisis, protectionism, reducing
the world's commodity and investment.

As of 2014 no nation uses a gold standard as the basis of its monetary system, however many hold
substantial gold reserves.

9. Bretton Woods
International monetary system is "big wheel" that allows the smooth running of economic processes in the
world and the achievement of economic goals. We had different international monetary systems
throughout history and in period from 1944 to 1973 there was Bretton Woods. The Bretton Woods
Agreement was developed at the United Nations Monetary and Financial Conference held in Bretton
Woods, New Hampshire, from July 1 to July 22, 1944.
The duration of the Bretton Woods system is divided into two main periods:

the period 1944-1958. - "Hunger" for the dollar and the shortage of dollars;
the period 1959-1971. - excessively use of dollar (prezasicenostdolara)

Characteristics of the Bretton Woods system:

gold-dollar standard - the dollar takes on the same role as the gold in the gold standard;
convertibility of dollars into gold at a fixed price ($ 35 per ounce);
dollar - the world currency
system of international payments based on the dollar;
the exchange rate defined in the dollar;
system of fixed exchange rates: fluctuations of 1% around the parity; obligations intervention in
the foreign exchange market in order to maintain the exchange rate within the allowable margin;

Major outcomes of the Bretton Woods conference included:

the formation of the International Monetary Fund and the International Bank for Reconstruction
and Development
proposed introduction of an adjustable pegged foreign exchange rate system. Currencies were
pegged to gold and the IMF was given the authority to intervene when an imbalance occurs
Agreed new monetary order, that regulate monetary relations among independent states
the financial strength of the UK definitely "moved" in the United States;
thanks to the economic and political power of the US, the agreement primarily based on White's
plan not Keynes

despite the outcomes, few advantages as in any fixed exchange rate system were, predictability, stability,
reduced foriegn exchange risks
The causes of the collapse of the Bretton Woods system:
internal causes :

the inadequacy of the system:

fiscal policy one instrument for the two objectives;
lack of international liquidity;
attachment to economic and political position of the US and the dollar;

external causes:

internal and external imbalances caused by rapid growth in the US budget spending and the
money supply;
US refusal to apply the methods of adjustment (restrictive policy), because that may lead to a
reduction in output and employment;
speculation on the value of the dollar relative to gold and other currencies; large purchases of
gold and other currencies;

10. The Theory of Optimum Currency Area and the Practice of Monetary
Integration
Monetary integration is specific monetary agreement among two or more countries which can occur in
two different ways:

National currency system with agreement upon fixed exchange rates

Full monetary union

First condition for creation of monetary integration is convertibility of member currencies.

Monetary integration should bring greater mobility of production factors and internationalization of
production and trade among members.
1. sporazum o fiksnim deviznim kursevima

nii stepen monetarne integracije;

lanice zadravaju sopstvene valute i zakljuuju stalni vrst sporazum o odravanju fiksnih
deviznih kurseva izmeu svojih valuta;

2. monetarna unija

vii stepen monetarne integracije;

karakteristike:
jedinstvena valuta ( zajednika valuta);
zajednika centralna banka;
koordinacija ekonomskih politika lanica (monetarne i fiskalne politike);
tei i sporiji proces;

Advantages of monetary union are:

elimination of foreign exchange risk,

greater movement of capital
movement of labour force

The theory of the optimal currency area was introduced by economist Robert Mundell. Optimum currency
area is a currency theory based on geographical area that adopts a fixed exchange rate regime or a single
currency within its boundaries in order to maximize economic efficiency. It describes the optimal
characteristics for the merger of currencies or the creation of a new currency. An optimal currency area is
often larger than a country.
In order for some area to be optimum currency area, introduction of common currency should provide
following:

Greater mobility of factors of labour and capital

Flexibility on labor market
Greater intensity of international trade within the area
Small number of countries within the area

Potential problems that this area may face:

Different levels of development and different economic priorities

Unbalanced economic movement of member's economies
Insufficient coordination of monetary and fiscal policies of member countries
Different reactions of members on different events in international relationships

Eurozone nisu: Hrvatska, UK, Danska, Svedska, Madjarska, Rumunija, Ceska, PoljskaiBugarska
European union nisu: Turska, Svicarska, Norveska, Island, Lihtenstajn, BiH, crnagora, albanija, srbija,
makedonija, moldavija, rusija, bjelorusija, ukrajna, andora, vatikan, Monaco, san marino
CEFTA: Albanija, BosnaiHercegovina, Crna Gora, Makedonija, Moldavija, Srbijai Kosovo.
CEFTA orginalnekojesuizaslekadsuusle u EU: eka, Maarska, Poljska, Slovaka Rumunjska i Bugarska,
HrvatskaSlovenija

EFTA: Lihtentajn, Norveku, Island i vicarsku.