1. INTRODUCTION TO INTERNATIONAL FINANCE May 17, 2011

2. QUIZ For numbers 1 and 2, identify two items from the list below which is included in the GDP of Phils. Dress bought online from F21 Pre-loved bag sold online Bag of sugar used by Starbucks Shoes made by locals in Marikina UAAP tickets sold by scalpers

3. QUIZ Use the following table to answer the following: 3. Nominal GDP 2008 4. Real GDP 2008 5. Real GDP growth rate 2008 BONUS: Peso-dollar exchange rate as of May 16, 2011

5. MACROECONOMICS Study of Economics in the aggregate level Aggregate  add up everything P – general price level Q – National output (Y) π – inflation (change in P) AS and AD

6. NATIONAL INCOME ACCOUNTING Gross Domestic Product Gross National Product Net Domestic Product

7. GROSS DOMESTIC PRODUCT Market value of all final goods and services produced in the country within a given period of time Measures the size of the economy and amount of economic activity Everything produced in the economy Excludes black market

8. GROSS DOMESTIC PRODUCT If not paid for, not counted (accounting) Cash-in-hand payments not included Intermediate goods – inputs are not included If not used immediately and stored for future use, then it is included as inventory Spatial and time limit

9. GDP per capita GDP/N Measure of standard of living

11. GROSS NATIONAL PRODUCT GDP + factor payments from abroad paid to domestically owned factors of production (Net Factor Income) NFI = income remitted in – income remitted out Gawa Ng Pilipino

12. NET DOMESTIC PRODUCT GDP – depreciation Value of production minus value of amount of capital used up in producing that output Best measure but impossible to compute

13. GDP MEASUREMENT Expenditure Approach Outgoing How we use products we produce Income approach Incoming Income must equal expenditure

14. INCOME APPROACH Y = C + S + T C = consumption S = savings T = tax

15. GDP GROWTH RATE GDP Growth Rate

16. NOMINAL GDP Measured in current prices

17. NOMINAL GDP Measured in current prices

18. HOW TO COMPUTE NOMINAL GDP For each good included in the GDP, multiply the quantity by the current price per unit in the given year Add up for all the goods Sum is the GDP for that year

19. NOMINAL GDP Nominal GDP Growth Rate If GDP increases, not specific whether it’s an increase in production or inflation

20. REAL GDP Measured using constant prices (base year)

21. REAL GDP Measured using constant prices (base year)

22. REAL GDP REAL GDP Growth Rate Since prices are constant, growth rate reflects an increase in production

23. HOW TO COMPUTE REAL GDP Choose a base year. For each good, multiply the quantity produced for that given year by the price of the base year. Add up. Sum is the real GDP for the given year.

24. INFLATION Rate of change of P Price Level – cumulation of past inflations

25. MEASURES OF PRICE LEVEL GDP Deflator (GDPd) Consumer Price Index Producer Price Index Chain-weighted GDP

26. GDP DEFLATOR Change in prices that has occurred between the base year and current year

27. GDP DEFLATOR What was worth P100 in 2007 is worth P109 in 2008 In 2008, if you want to buy the same goods and services, you need to pay P109. Back in 2007, you only paid P100 for it.

28. HOW TO COMPUTE GDPd For each year, divide the nominal GDP by the real GDP. The answer is the GDPd.

29. GDP DEFLATOR Rate of change of GDPd

30. CONSUMER PRICE INDEX Cost of buying a fixed basket of goods

31. CONSUMER PRICE INDEX

32. HOW TO COMPUTE THE CPI Choose a base year. For each good included in the CPI, index the prices by dividing the given price by the price of the base year. Assign weights to each good. For each good, multiply its index by its assigned weight. Sum it up and the total is the CPI for that year.

33. CONSUMER PRICE INDEX

34. GDPd vs. CPI GDPd includes all that is produced CPI only includes those consumed by the average consumer GDP better measure for forecasting CPI better measure of standard of living (Dev Eco)

35. GDPd vs. CPI GDPd differs from year to year CPI has same basket of goods GDPd does not reflect price of imports CPI reflects price of important imports

36. GDPd vs. CPI GDPd increases at a slower pace CPI more reactive to changes in price Producer Price Index Same as CPI but basket of goods for producers

37. Intro to the ForEx Market Foreign Exchange Market – market in which individuals, firms and financial institutions buy and sell foreign currency

38. Intro to the ForEx Market Types: End users – Banks Bank – bank (bulk) Bank – Central Bank (BSP)

39. Intro to the ForEx Market Daily (57%) UK $1,359B (34%) US $664B (17%) Japan $238B (6%) RP $2B (0.1%)

40. Intro to the ForEx Market USD 43% EUR 19% JPY 8% GBP 7% PHP 0.1% 77.1%

41. Philippine Dealing System Online 9:00am-4:00pm Weighted average Volume Clearing house at Citibank Traders are anonymous Lower is high

42. 16 Nov 2010: P46.90/$ Open: P46.9/$ $100 (volume) Close: P47.9/$ $100 (volume) $200 Always look at volume Weighted ave today is reference rate tomorrow

43. www.pdex.com

44. Example: P46.5/$ $200M P44.0/$ $1 AVERAGE = P45.25/$ WEIGHTED AVERAGE = P46.50/$ (P46.5)(200,000,000/200,000,001) + (P44)(1/200,000,001)

45. BID/OFFER Each trader places a bid/offer Bid – how much you’re willing to pay for $1 Offer – how much you’re willing to sell $1

46. BID/OFFER

47. Currency Arbitrage Buy low, sell high Make money by shuffling money

48. RULES Each trader deposits PHP and USD in Citibank (clearing house) Impaired Capital Each trader can only buy/sell a maximum of minimum, either ($50M or 20% of impaired capital)

49. RULES Example: Bank A $50M, $100M (20%) Bank B $50M, $40M (20%)

50. 2% - 1% - 1% bands If exchange rate reaches +/- 2%, trading stops for two hours Someone might be speculating/panic Dirty flexible exchange rate Creates sort of stability Avoids speculation

51. FOREX SUPPLY AND DEMAND Exchange rate – price of domestic currency per unit of foreign currency Phil – US: P/$ Phil – Japan: P/Y

52. FOREX SUPPLY AND DEMAND Flexible/floating exchange rate Exchange rate that is market determined Depreciation – market determined increase of P price of foreign currency P46.7/$  P47.63/$

53. FOREX SUPPLY AND DEMAND Appreciation – market determined decrease of P price of foreign currency Ex: P46.7/$  P45.77/$

54. FOREX SUPPLY AND DEMAND Fixed Exchange Rate Exchange rate that is artificially determined Devaluation – non-market determined increase of P price of foreign currency

55. FOREX SUPPLY AND DEMAND Revaluation – non-market determined decrease of P price of foreign currency Demand for $ - determined by import market Supply of $ - determined by export market

56. If P/$ rate appreciates/depreciates is that because of a stronger Peso or a collapse of $? Is it merely in relation to $, if we trade with other countries as well?

57. EFFECTIVE EXCHANGE RATE Measure of overall performance of domestic currency Able to figure out if Peso is weak or $ is strong

58. EFFECTIVE EXCHANGE RATE Measure the weight/importance of each Index the forex rates by dividing current year rate by base year rate Multiply weight and index If EER goes down, P appreciates

59. ABSOLUTE PURCHASING POWER PARITY Due to the Law of One Price, commodity arbitrage makes exchange rate equal to where prices equal across countries Commodity arbitrage – buy low, sell high, commodities

60. ABSOLUTE PURCHASING POWER PARITY Example #1 P20.00/burger in RP $0.40/burger in US Suppose, P40/$ US: Need P16  $0.40 (A) RP: Need $0.5  P20 (B) A: buy burgers in US, sell in RP

61. ABSOLUTE PURCHASING POWER PARITY As soon as everyone sees this opportunity, everyone does it Pesos are exchanged for dollars to buy US burgers Peso depreciates since demand for dollar goes up

62. ABSOLUTE PURCHASING POWER PARITY Example #2 Suppose, P60/$ US: Need P24  $0.4/burger (A) RP: Need $0.33  P20/burger (B) Use P20 to buy burger in RP and sell in US market Appreciation – supply of dollars increase ($ converted to P)

63. ABSOLUTE PURCHASING POWER PARITY Example #3 P50/$ US: P20$0.4 burger (A) RP: $0.4P20 burger (B) No difference LAW OF ONE PRICE

64. BIG MAC INDEX Big Mac is the same everywhere no incentive to increase or decrease price Not a good index in RP since not high demand Distorted because of Jollibee Should be “same” for all countries

65. ABSOLUTE PURCHASING POWER PARITY Right commodity must be used, with no other factors to distort Basketball Ipod

66. ABSOLUTE PURCHASING POWER PARITY Does not take into account non-traded goods Ex: Haircut P50/haircut $10/haircut Exchange rate: P5/$??? Barbers don’t go from one place to another

67. HOMEWORK Wed: Check the price per stock of your chosen company/ies (May 17) Thurs: 2 pcs, 5x8 or ½ index cards (with or without notes yet) USB (clean) with video CD (with names) with video