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REGIONAL AND ECONOIC INTEGRATION

Learning objectives:

1. Describe how demand and supply determine the price of foreign exchange.
2. Discuss the role of international banks in the foreign-exchange market.
3. Assess the different ways that firms can use the spot and forward markets to settle international transactions.
4. Summarize the role of arbitrage in the foreign-exchange market.
5. Discuss the important aspects of the international capital market.

IMPORTANT TERMS:

1. Foreign exchange is a commodity that consists of currencies issued by countries other than one’s own. The exchange rate is the price of one currency in terms of another, at the equilibrium price of the foreign currency.
2. A direct quote is the price of the foreign currency in terms of the home currency, while an indirect quote is the price of the home currency in terms of the foreign currency

Introduction:

1. Traditionally, different countries have different currencies (although the appearance of the EU and the euro have dramatically decreased the number of international currencies that most people will use). If you have examples of different currencies, these can be shown or passed around. Students are particularly intrigued by the pictures of foreign rulers on foreign currency, many of whom they have never heard of.



Read more: MGT520 - International Business - Lecture Handout 41

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REGIONAL AND ECONOIC INTEGRATION

The Case for Regional Integration:

1. The economic case for integration has been largely presented in the previous chapters. Free trade and movement of goods, services, capital, and factors of production allow for the most efficient use of resources. That is positive sum game, as all countries can benefit.
2. Regional economic integration is an attempt to go beyond the limitations of WTO. While it is hard for 100 countries to agree on something, (e.g.. the United Nations) it is much more likely that only a few countries with close proximity and common interests will be able to agree to even fewer restrictions on the flows between their countries.
3. The political case for integration has two main points: 1) by linking countries together, making them more dependent on each other, and forming a structure where they regularly have to interact, the likelihood of violent conflict and war will decrease. 2) by linking countries together, they have greater clout and are politically much stronger in dealing with other nations.
4. In the case of the EU, both a desire to decrease the likelihood of another world war and an interest in being strong enough to stand up to the US and USSR were factors in its creation.
5. There are two main impediments to integration: 1) there are always painful adjustments, and groups that are likely to be directly hurt by integration will lobby hard to prevent losses, 2) concerns about loss of sovereignty and control over domestic interests. Canada has always been concerned about being dominated by its southern neighbor, and Britain is very hesitant to give much control to European bureaucrats (as of this writing it still has not adopted the euro).
6. The case on NAFTA and the US Textile Industry shows that although the effects of NAFTA have hurt employment in the US textile industry, the overall effect has actually been positive. The reason: clothing prices have fallen, exports have increased, and sales to apparel factories have surged. Those factors more than compensate for the loss of jobs.



Read more: MGT520 - International Business - Lecture Handout 39