Assignment 220
Delp10
B207BPowerpoint-Week1.pptxB207B
Shaping Business Opportunities II
Block 2
Session 5: Economic and financial flows in a globalized world
The role of international financial institutions
International financial institutions play an important enabling function for the global economic system.
They are established by countries to ensure mechanisms for international financial cooperation, for example by providing financial support (via grants and loans) for economic and social development activities in developing countries.
The two key international financial institutions
1. The International Monetary Fund (IMF):
The International Monetary Fund (IMF) was conceived at a United Nations (UN) conference in Bretton Woods, New Hampshire, United States of America, in July 1944.
Founding countries sought to build a framework for economic cooperation to avoid a repetition of the competitive devaluations that had contributed to the Great Depression of the 1930s.
Competitive devaluations are made by countries that reduce the value of their exchange rates to make their exports cheaper in order to gain a competitive advantage over other countries.
The IMF’s primary purpose is to ensure the stability of the international monetary system – the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other.
The two key international financial institutions
2. The World Bank
The World Bank Group, like the IMF, was established in 1944.
It has its headquarters in Washington, D.C., and has more than 10,000 employees in more than 120 offices worldwide.
The World Bank is made up of 189 member countries, like a cooperative.
These member countries, or shareholders, are represented by a Board of Governors, who are the ultimate policymakers at the World Bank.
Generally, the governors are ministers of finance or ministers of development of the member countries.
The World Bank Group has set two goals for the world to achieve by 2030:
End extreme poverty by decreasing the percentage of people living on less than US$1.90 a day to no more than 3%;
Promote shared prosperity by fostering the income growth of the bottom 40% for every country.
Block 2- Reading 4
Economic and financial flows in a globalised world
The balance of payments
The balance of payments is an economic indicator that tracks all transactions between individuals, firms or government bodies of a given country and the rest of the world during a certain period of time (a quarter of a year or one year).
There are three main parts of the balance of payments:
The current account
The capital account
The financial account
The balance of payments
The current account – registers payments for imports and exports for trade in goods and/or services, plus incomes and transfers of money to and from abroad made by individuals.
The capital account – records all transfers of capital to and from abroad. For example, this may involve a German firm building a factory in Brazil. This is counted as a credit on the Brazilian capital account.
The financial account – records financial inflows and also covers claims on or liabilities to non-residents, specifically with regard to financial assets; it includes direct investments, portfolio investments and reserve assets.
Reserve assets are, for example, currencies, commodities or other financial capital held by monetary authorities, such as central banks.
The balance of payments
The whole account must balance, just as it would for the financial statement.
This is a technical requirement, so surpluses or deficits can be recorded on any specific part of the account.
The balance of payments can help us to understand the comparative position of a country in relation to others.
For example, a country with a large current account deficit is a country that is borrowing money to purchase goods and services produced outside the country.
Global imbalances can occur and are reflected in large and persistent deficits or surpluses in the current, capital and/or financial account balances.
The adjustment of global imbalances can be left to market forces and/or corrected by government actions
FDI: Foreign direct investments
FDIs are a form of investment made by companies (for example, multinationals) that establish plants and offices in other countries in order to produce or to sell their products and services in countries around the world
FDIs are aimed at securing operational control and they should be distinguished from portfolio investments (PIs) whereby financial assets are bought and sold; in this latter case, individuals or even companies make financial investments in other countries, for example by buying shares, rather than setting up their own manufacturing plant, a distribution channel or stores.
Example: The Tommy Hilfiger Corporation is
headquartered in Hong Kong,
incorporated in the British Virgin Islands.
It is listed on the New York Stock Exchange,
it’s owned primarily by international institutional investors,
held its annual meeting of shareholders in Barbados.
(It) sourced production to manufacturers in Mexico and Asia.
(It) Licensed its name to producers globally and retailed its classic American clothing in Europe and North America.
Example of multinational
The Tommy Hilfiger Corporation is
Headquartered in Hong Kong,
Incorporated in the British Virgin Islands.
It is listed on the New York Stock Exchange,
It’s owned primarily by international institutional investors,
Hold its annual meeting of shareholders in Barbados.
(It) sourced production to manufacturers in Mexico and Asia.
(It) Licensed its name to producers globally and retailed its classic American clothing in Europe and North America.
