International Financial System and World Economic Organizations

G 20: Evolution
G6 in 1975 G7 in 1976 G8 in 1997 G20 in 2009

G 20
19 states plus EU Participants: ministers of finance, governors of central banks, head of states (sometime) Objective: cooperation in the field of international financial system No permanent secretariat Chaired by Troika: the past, present and future chairs Holds 85% of GDP and two thirds of world population

GDP and DNP

GDP = the value of the final output produced in a country (by the national and foreign firms); its is defined according to location; GNP = the value of the final output produced by national firms (in and outside the country); it is defined by ownership; G (D or N) P: the sum of the value added by all firms Value added: the market value of the output the value of goods and services bought by the firm for its own production (the value of outside inputs)

GDP and national prices

GDP at current exchange rates GDP at purchasing power parity exchange rates :better for international comparisons

GDP and the living standard

GDP is not a measure of the living standard, but sooner or later determines it: investment (negative one as well) and consumption GDP excludes non-market activities as household production: great disadvantage for the less developed countries It does not include black market activities It ignores distribution of wealth and the previous production of wealth

GDP per capita (1)

RankCountryGDP - per capita (PPP) (US$)1Liechtenstein118,000 2Qatar85,600 3Luxembourg79,600 4Bermuda69,900 5Jersey57,000 6Norway54,900 7Brunei54,400 8Kuwait54,300 9Singapore48,500 10United States46,300 11Ireland45,100 12Guernsey44,600 13Cayman Islands43,800 14San Marino41,900 15Hong Kong40,500 16Iceland40,100 17Switzerland40,000 18Andorra38,800 19Canada38,700 20Netherlands38,600 21British Virgin Islands38,500 22Austria38,300 23United Arab Emirates37,400 24Sweden37,300 25Denmark37,200 26Australia36,700 27Belgium36,200 28United Kingdom35,500

GDP per capita (2)

29Falkland Islands (Islas Malvinas)35,400 30Finland35,200 31Man, Isle of35,000 32Germany34,200 33Japan33,400 34Bahrain33,300 35Spain33,100 36France32,800 37Italy31,200 38Faroe Islands31,000 39Greece30,000 40Monaco30,000 41Bahamas, The29,600 42Taiwan29,500 43Equatorial Guinea29,000 44Macau28,400 45Gibraltar27,900 46New Zealand27,600 47Slovenia26,700 48Israel26,700 49Korea, South25,800 50Czech Republic23,700

GDP per capita (3)

51Malta23,300 52Portugal21,900 53Aruba21,800 54Trinidad and Tobago21,500 55Estonia20,200 56Greenland20,000 57Saudi Arabia19,800 58Hungary19,300 59Oman19,200 60Seychelles18,900 61Puerto Rico18,700 62Slovakia18,700 63Saint Kitts and Nevis18,600 64Barbados18,500 65Antigua and Barbuda18,100 66French Polynesia17,500 67Croatia17,000 68Latvia16,300 69Netherlands Antilles16,000 70Lithuania15,600 71Poland15,500 72New Caledonia15,000 73Guam15,000 74Virgin Islands14,500 75Malaysia14,200 76Russia14,000 77Chile14,000 78Mexico13,900 79Gabon13,700 80Botswana13,400 81Libya13,300 82Argentina12,500 83Northern Mariana Islands12,500

GDP per capita (4)

84Grenada12,300 85Venezuela12,300 86Turkey11,600 87Turks and Caicos Islands11,500 88Iran11,300 89Bulgaria11,300 90Mauritius11,100 91Saint Lucia10,900 92Costa Rica10,800 93Romania10,700 94Uruguay10,700 95Kazakhstan10,400 96Lebanon10,300 97Panama9,900 98Belarus9,800 99Dominica9,600 100South Africa9,500 101Brazil9,400 102Saint Vincent and the Grenadines9,400 103Cook Islands9,100 104Anguilla8,800 105Cuba8,500 106Montenegro8,400 107Belize8,400 108Colombia8,200 109Suriname8,200 110Macedonia, The

GDP per capita (5)

Former Yugoslav Republic of8,200 111Thailand7,900 112Palau7,600 113Jamaica7,500 114Dominican Republic7,400 115Peru7,300 116Tunisia7,200 117Ecuador7,100 118Saint Pierre and Miquelon7,000 119Angola7,000 120Azerbaijan6,900 121Algeria6,600 122Ukraine6,600 123Namibia6,000 124El Salvador6,000 125Bosnia and Herzegovina5,900 126American Samoa5,800 127Niue5,800 128Albania5,400 129Kiribati5,300 130Armenia5,200 131Turkmenistan5,100 132Guatemala5,000 133Nauru5,000 134Mayotte4,900 135China4,900 136Egypt4,900 137Jordan4,800 138Samoa4,700 139Swaziland4,700 140Tonga4,700

GDP per capita (6)

141Syria4,700 142Maldives4,400 143Honduras4,200 144Bolivia4,200 145Fiji4,200 146Bhutan4,100 147Vanuatu4,100 148Congo, Republic of the4,000 149Georgia4,000 150Sri Lanka3,900 151Paraguay3,900 152Morocco3,800 153Wallis and Futuna3,800 154Guyana3,600 155Indonesia3,500 156Iraq3,500 157Djibouti3,500 158Cape Verde3,400 159Montserrat3,400 160Philippines3,100 161Marshall Islands2,900 162West Bank2,900 163Nicaragua2,800 164Mongolia2,700 165Saint Helena2,500 166India2,500 167Western Sahara2,500

GDP per capita (7)

168Vietnam2,500 169Yemen2,400 170Pakistan2,400 171Micronesia, Federated States of2,300 172Cameroon2,300 173Uzbekistan2,200 174Moldova2,200 175Nigeria2,100 176Mauritania2,100 177Papua New Guinea2,000 178Sudan1,900 179Kyrgyzstan1,900 180Laos1,900 181East Timor1,900 182Korea, North1,800 183Cambodia1,800 184Cote d'Ivoire1,700 185Kenya1,600 186Chad1,600 187Solomon Islands1,600 188Senegal1,600 189Tajikistan1,600 190Tuvalu1,600 191Benin1,500 192Lesotho1,400 193Zambia1,400 194Ghana1,300 195Sao Tome and Principe1,300 196Bangladesh1,300 197Haiti1,300 198Mali1,200

GDP per capita (8)

199Tanzania1,200 200Uganda1,200 201Gambia, The1,200 202Burkina Faso1,100 203Gaza Strip1,100 204Comoros1,100 205Guinea1,100 206Burma1,100 207Nepal1,000 208Tokelau1,000 209Togo900 210Madagascar900 211Malawi800 212Mozambique800 213Rwanda800 214Central African Republic700 215Ethiopia700 216Eritrea700 217Afghanistan600 218Somalia600 219Sierra Leone600 220GuineaBissau600 221Niger600 222Liberia400 223Burundi400 224Congo, Democratic Republic of the300 225Zimbabwe200

Foreign exchange market (1)

Appreciation Depreciation Spot transactions and forward transactions

Foreign exchange market (2)

Why are exchange rates important? The price of a foreign French good to an American buyer depends on: (1)the price of the good on French market and (2)the exchange rate between dollar and franc

Foreign exchange market (3)

When a countrys currency appreciates, the countrys goods abroad become more expansive and foreign goods in that country become cheaper

Purchasing power parity

The exchange rate is derived by dividing the prices on the national markets of one good US: one pair of jeans=35 dollars Romania: one pair of jeans=105 lei 1 US dollar=3.5 lei

Purchasing power parity (2)

It works very well in the long run: exchange rates follow changes in the price levels An increase in the price level (inflation) in some country tends to be followed by a depreciation of its currency

Factors in the long and short run

Relative price level; a rise in the price level tends to depreciate the currency of the country Tariffs and quotas (on imports: tend to appreciate the currency of the country Productivity: appreciate the currency of the country Relative interest rate: direct relationship Relative incomes: inverse relationship

Exchange rate regimes (1)

Fixed rates Gold standard: currencies were directly convertible into gold Under gold standard the exchange rates were fixed and calculated based on the quantities of gold currencies could be turned into

Exchange rate regimes (2)

Gold standard disappeared with the coming of World War I. Because of the great trade disruptions (deficits) convertibility was suspended Bretton Woods System: US dollar - the reserve currency which was convertible in gold for foreign governments and central banks

Exchange rate regimes (3)

Evaluation and devaluation The floating exchange rates system The current managed float exchange rate system

Balance of payments (1)

Recording of all payments between a country and all other countries The principle of double-entry accounting All payments to the country by foreigners are receipts and are recorded with + All payments to foreigners are recorded with -

Balance of payments (2)

Trade balance: surplus and deficit Trade balance and economic performance Increase and decrease in official reserves

Financial crisis of 2007-2010 (1)

Crisis of 1929-1932 led to financial regulation enforced through GlassSteagall Act of 1933 Major objectives: I/separation of investment banks from commercial banks because of conflicts of interest=the same financial unit has the power to make loans and engage in investment activities

Financial crisis of 2007-2010 (2)

2/Commercial banks has to manage safely the money of the population, while financial institutions entails great risk 3/Managing the money deposited and engaging in investment activities entails too much power: the two activities has to be separated

Financial crisis of 2007-2010 (3)

II. Insuring populations deposits (up to a limit): Federal Deposit Insurance Corporation

Financial crisis of 2007-2010 (4)

Glass-Steagall Act contains the lessens of 1929-1933 crisis and its repeal prepared the road to 2007-2010 crisis; Part of the Act was repealed in 1980 (the ability of FED to regulate interests on deposits) and all of it was repealed in 1999.

Consequences
1/Banks engaged in buying securities with high risk 2/Sub-prime loans were before the repeal about 5% of all mortgage loans; in 2008 they rose to 30%.