Chapter 9: The Globalization of International Finance Three Characteristics of Globalization • Growing importance of international trade in local and domestic economies • The cost and time to move almost anything around the world is decreasing • Money and investment flow across borders in sums vastly larger than only a few years ago Copyright © 2009 Cengage Learning All rights reserved International Political Economy • Geopolitics: The relationship between geography and the economic conditions and behavior of states that define their levels of production, trade, and consumption of goods and services • Geoeconomics: The relationship between geography and politics and their consequences for states’ national interests and relative power Copyright © 2009 Cengage Learning All rights reserved The Rising Flow of Capital Across Borders • Arbitrage • Effects of globalization: Decreased the control that states can have over their own currency Increased the level of financial interdependence among states • Capital mobility hypothesis • Inequalities Copyright © 2009 Cengage Learning All rights reserved The International Flow of Finance Capital Copyright © 2009 Cengage Learning All rights reserved Monetary Policy • Manipulations by central banks to control inflation and regulate the economy Change money supply Manipulate interest rates Control inflation Promote economic growth and trade Copyright © 2009 Cengage Learning All rights reserved ABC: Economy Interview with Neil MacKinnon Click the icon to open the movie Copyright © 2009 Cengage Learning All rights reserved Questions for Discussion What effects does the weak dollar have on the overall global economy? What factors you think will bring about an economic recovery for the U.S.? How about for the rest of the world? Copyright © 2009 Cengage Learning All rights reserved Exchange Rates • Fixed exchange rate • Floating exchange rate: Since early 1970s • Managed exchange rate system: European Monetary System • Official exchange rate • Devaluation Copyright © 2009 Cengage Learning All rights reserved Systems of International Financial Arrangements System I: Classical Gold Standard (1870–1914) Intervening Period: Interwar Era (1914–1944) System II: Bretton Woods (1946–1971) Intervening Period II: Post-Bretton Woods (1971–1980s) System III: Capital Mobility (1980s– ) Copyright © 2009 Cengage Learning All rights reserved 10 Calculating the Changing Cost of Goods in the Globe’s Confusing Currency Exchange System Copyright © 2009 Cengage Learning All rights reserved 11 Bretton Woods Monetary System • Fixed exchange rates maintained by governments • International Monetary Fund: Balance of payments and exchange-rate stability • World Bank: Loans for economic development • U.S dollar: Convertible at $35 per ounce of gold Copyright © 2009 Cengage Learning All rights reserved 12 Floating Exchange Rates • 1971: Nixon ends dollars for gold • End of Bretton Woods exchange rates • Floating exchange rates Vary by changing economic conditions Problems for central banks Compounded by financial crises International cooperation to manage rates Copyright © 2009 Cengage Learning All rights reserved 13 Reforming the International Financial Architecture • Regional currency union European Union • Gold standard • Return to fixed but adjustable rates ã Dollarization Copyright â 2009 Cengage Learning All rights reserved 14 Questions for Critical Thinking (1 of 2) In what ways the low politics of international political economy and the high politics of international security affect each other? In what ways does the international political economy affect your life? Copyright © 2009 Cengage Learning All rights reserved 15 Questions for Critical Thinking (2 of 2) In what ways is mercantilism linked to realism? Can the United States fill the role of hegemon? What states or groups of states could potentially assume the role of hegemon? Copyright © 2009 Cengage Learning All rights reserved 16 Web Links • Organization of Economic Co-Opera tion and Development Copyright © 2009 Cengage Learning All rights reserved 17 ... Critical Thinking (1 of 2) In what ways the low politics of international political economy and the high politics of international security affect each other? In what ways does the international political... reserved The Rising Flow of Capital Across Borders • Arbitrage • Effects of globalization: Decreased the control that states can have over their own currency Increased the level of financial... Thinking (2 of 2) In what ways is mercantilism linked to realism? Can the United States fill the role of hegemon? What states or groups of states could potentially assume the role of hegemon?