3460.01 notes: a.p. palasvirta, ph.d.. david ricardo factors of production labor fixed assets...

3460.01

Notes: A.P. Palasvirta, Ph.D.

David Ricardo Factors of production

LaborFixed assets

Buildings Land resources

Capital Ability to attract financing

Technology Intellectual capital

April 21, 20233460.01 globalization notes: a.p. palasvirta, ph.d. 2

Seeks lowest relative cost factorsAlberta increases taxes on gas and oil

Production migrates to Saskatchewan (lower cost)

Appendix 1ACountry A

Food cost of textiles = 1.67 in inputs Textile cost of food = 0.6 in inputs Country A specializes in textiles

Country B Food cost of textiles = 3.75 in inputs Textile cost of food = 0.2667 in inputs Country B specializes in food


Globalization International financial system

Exchange markets Banking and money markets Bond and equity markets Derivative markets

Foreign exchange exposure transaction Economic Translation

Financial management of the multinational firm Foreign direct investment Capital structure & capital budgeting Imports, exports


Exchange rates (linear regression)Trend

Slope of trend line of time-series regression Positive- currency depreciating

Volatility Standard error of estimate of time-series

regression Low value - low risk

Affect on real exchange rates Violation of purchasing power parity condition Something real is changing


e tt

Exists as a function of potential change in rules (laws pertaining to business)Expropriation (Venezuela, Hugo Chavez)

Quick compensation at fair market valueWar (Iraq, Afghanistan)Protectionism

Increasing the barriers to trade Tariffs (U.S. import tariffs on Canadian lumber) Quotas (European restrictions on genetically

modify food) Subsidies (export subsidies to produce wheat,

corn) Regulatory (including labor & environmental

standards in treaties)


Those in power make the rules redistribution of wealth and income

Monetary policy Fiscal policy Regulatory policy

Corruption Soft corruption - political contributions Hard corruption - bribes


Inside governanceStockholders

Concerned about value maximizationBoard of directors

Subset of stockholdersHire managersStrategic decision making

Managers Tactical decisions making (strategic)


Many buyers, many sellersNo market power, thick markets

Low or no transactions costs (taxes)Transactions costs and taxes distort

Perfect informationEliminates agency


U.S., Canadian, British Market failures

Enron, etc.Failure of corporate governance structure

Sarbanes Oxley CEO, CFO sign off on financial statements Audit, compensation committees external Corporate officers cannot take loans from firm Test their own financial controls against fraud


Protect shareholder rightsMajority and minority

Protect stakeholder rightsCustomers deserve good products and

reasonable pricesFirms should be good citizens

Disclosure and transparency


other arrangements internationallyGovernment (privatized utilities) Institutions

Banks, hedge funds, insurance companiesFamily enterprises

Family conglomerates (France, South America) Consortiums

Keiretsus (Japan) chaebols (South Korea)


China, Russia, Arab Emirates Increasingly have huge resources to spend

due to trade and/or oil (sovereign wealth funds)

UAE $875,000,000,000Norway $360 billionSingapore (GIC) $330 billionSaudi Arabia $300 billionKuwait $250 billionChina $200 billionSingapore (Temasek) $59.2 billionLibya $50 billionQuatar $50 billionAlgeria $42.6 billion


Governments do not necessarily worry about the bottom line (maximizing profits/value)

Governments have political agenda??How much of what Russia and China do is

politically motivated Chinese exchange rate policy Russian interrupting gas supplies to Europe

Central bank holdingsU.S. Dollar denominate t-bills

China approximately $1 trillion


Family owned conglomeratesSouth America, Asia, FranceFamilies own a diversified portfolio of real

assets Bank ownership of equity stakes

Germany, Korea Government ownership of equity stakes

Canada, China, Russia


Concentration of powerMarkets for equities and debt are thin

Few buyers, few sellers Stock price manipulation

Lack of transparency Highly asymmetric information

Government often complicit with firmsGoods and service markets manipulated


Equity markets ( concern Value)Analysis and trading (information)

Stock price moves on informationUp means excess demand at current priceDown means excess supply at current price

Debt markets (concern risk)Analysis and trading (information)

Debt prices move on Inflationary pressures, exchange rate

movements, central bank mutteringsRisk


Hired gunsAccountantsLawyers

Regulators Stakeholders - Agency problems

Customers/managementManagement/laborStock holders/managementGovernment/management


Cultural differencesCorporate governanceLegal environmentRegulatory environment

Different currenciesExchange rate riskHedging behavior

Forwards, futures, options, swaps


Simple ratioCanadian dollar (cd) price usd

usd price of cd

http://fx.sauder.ubc.ca/etc/CADpages.pdf


ecd

usdcd usd,

.

1 1371

1

eusd

cdusd cd,

.

0 8794

1

Complex concept Equilibrium price at which supply equals

demand

Demand for USD (by Canadians) Canadians buying American

Importing goodsBuying U.S. securities

Supply of USD (by Canadians) Canadians selling to Americans

Exporting goods Attracting U.S. based investors


DeregulationElimination of fixed brokerage fees

U.S. 1975 England 1986

Benefits Lower transactions costs Cross border listings International financial market integration More innovation

Disadvantages More innovation

More opacity (lack of information)

04/21/233460.01 globalization notes: a.p. palasvirta, ph.d. 22

DisintegrationMortgage backed securities

Tranches of mortgages bundled for sale in secondaryh markets

Housing bubbleViral effects

BankingLack of proper capital adequacy relative to riskLack of oversight of new financial instruments

Other sectorsLack of liquidity led to failures


ReregulationCapital adequacyErection of walls to reduce conflicts of

interest Commercial banking

Deposits insured by government Investment banking

Reporting requirements Insurance Mutual funds

Increasing oversight (Madoff)


1999Austria,Belgium, Finland,France, Germany,

Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spains

BenefitsReduce exposureFinancial market convergence

Lower costs of borrowing More depth, more liquidity

Disadvantages12 different fiscal policies


ImplosionPIIGS (Portugal, Italy, Ireland, Greece,

Spain) Running large deficits (more than 10% of GDP) Increasing large government debtt (around

100% of GDP)No exchange rate depreciation to bail them

out to make their products cheaper Retrenchment

Germany & France bailing out the PIIGSNew regulations and enforcement


Trade treatiesThe European UnionNorth American Free Trade Association

(NAFTA)World Trade Organization (WTO)

Doho round trying to liberalize agricultural trade and intellectual property

RetrenchmentProtectionism

Labor regulations Environmental regulations


Business firms operating in multiple countries Inputs (raw materials, intermediate goods

(engines)Financing alternativesLabor & capital (outsourcing)Product markets

AdvantagesEconomics of scale & scopePurchasing power with suppliersResearch & development


DisadvantagesLoss of control

Different culturesCountry & corporate

DistanceHarder to supervise

Cost control Quality control

Transportation costsDifferent regulatory, political environmentsExpropriation


3460.01 notes: a.p. palasvirta, ph.d.. david ricardo factors of production labor fixed assets...

Documents

globalization notes

inputstextile cost of

real exchange ratesviolation

sellersno market power

financial statementsaudit

inputscountry b

hugo chavezquick compensation

fair market valuewar