Week 1

Republic of the Philippines
City of Olongapo
GORDON COLLEGE
Olongapo City Sports Complex, East Tapinac, Olongapo City
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DETAILED LEARNING MODULE

Title: GLOBAL FINANCE WITH ELECTRONIC BANKING
Module No.
I. Introduction
The global financial system is the worldwide framework of legal agreements,
institutions, and both formal and informal economic actors that together facilitate
international flows of financial capital for purposes of investment and trade
financing. While Electronic banking is a form of banking in which funds are
transferred through an exchange of electronic signals rather than through an
exchange of cash, checks, or other types of paper documents.
II. Learning Objectives
After studying this module, you should be able to:
 Discuss the National income accounting and the balance of payment

 Discuss the Introduction Of Global Finance
 Explain the importance of the Exchange rates
III. Topics and Key Concepts
 Introduction
 National income accounting and the balance of payment
 Exchange rates
IV. Teaching and Learning Materials and Resources
 Internet
 Laptop/ android phones
 Power point presentation
V. Learning Task
 View on line video included on the power point presentation

 Short online quiz
VI. Reference
http://www.amyglenn.com/ECON/econ2302global.htm
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https://saylordotorg.github.io/text_international-finance-theory-and-policy/s05-
national-income-and-the-balanc.html
https://www.investopedia.com/terms/e/exchangerate.asp
LECTURE:
Introduction Of Global Finance
The Global Financial System Growing Cross-Border Links (GFS)
A financial system refers to a set of components and mechanisms, such as monetary

policies, insurance and banks, that allows economic transactions to occur. There are
many types of financial systems that exist on different levels of society, ranging from
those used to operate transactions within a company to those that facilitate international
financial transactions. Without these systems, many normal activities would become
difficult, if not impossible, such as trading and investing.
Money, credit cards and checks are examples of the types of components that may exist
in a financial system. An accounting method, an auditing service and financing
procedures are examples of mechanisms that facilitate the operation of these systems.
The absence of a financial system would produce drastic changes because people may
not have access to credit, there would be no monetary products to exchange for goods
and there would be no policies regulating complex transactions.
Since the dawn of creation, people have engaged in financial transactions of some sort.
Today, financial transactions often take place on an international level within the global
financial system. This system allows markets to exchange information and financially
impact each other around the clock. The technical definition for a global financial system,
however, is a system composed of financial institutions and regulators that act on an
international level. As globalization evolves, the system becomes more influential in
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many individual country’s economies.
The global financial system is responsible for providing core economic functions. The
system facilitates trades, provides a mechanism for the pooling of resources, manages
financial risks, provides price information, and provides ways for countries to transfer
economic resources across borders and among different industries with ease. The
financial system is a complex system that functions and changes with the economic and
political climate. Despite differences in cultural, political and historical backgrounds,
countries come and work together in the global system.
International Economic Actors The GFS
Each of the core economic functions - consumption, production and investment - have
become highly globalized in recent decades. While consumers increasingly import foreign
goods or purchase domestic goods produced with foreign inputs, businesses continue to
expand production internationally to meet an increasingly globalized consumption in the
world economy. International financial integration among nations has afforded investors
the opportunity to diversify their asset portfolios by investing abroad. Consumers,
multinational corporations, individual and institutional investors, and financial
intermediaries (such as banks) are the key economic actors within the global financial
system. Central banks (such as the European Central Bank or the US Federal Reserve
System) undertake open market operations in their efforts to realize monetary policy
goals. International financial institutions such as the Bretton Woods institutions,
multilateral development banks and other development finance institutions provide
emergency financing to countries in crisis, provide risk mitigation tools to prospective
foreign investors, and assemble capital for development finance and poverty reduction
initiatives. Trade organizations such as the World Trade Organization, Institute of
International Finance, and the World Federation of Exchanges attempt to ease trade,
facilitate trade disputes and address economic affairs, promote standards, and sponsor
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research and statistics publications.

Examples of International Financial Institutions
A. International Monetary Fund (IMF)
The International Monetary Fund (IMF) is an international organization headquartered in

the United States which promotes the maintenance of a healthy global economy. There
are 185 member nations in the IMF, which means that almost every country in the world
is in the IMF, and the handful of countries which do not belong are usually represented
indirectly. In the course of its daily operations, the IMF works closely with the
International Bank for Reconstruction and Development, more commonly known as the
World Bank.
Groundwork for the establishment of the IMF was laid at the Bretton Woods conference
in 1944. The nations at the conference agreed that a rapid plan needed to be put into
action to promote economic recovery in the wake of the Second World War. The goal
was to make funds readily available for reconstruction and the rebuilding of key
economies which had been devastated by the war by establishing an international
monetary exchange rate system. From there, the IMF naturally expanded to an
organization with international scope.
One of the key roles of the IMF in the global economy is as a lender to nations which are
struggling economically. The IMF acts as a lender of last resort for members in financial
distress, e.g., currency crisis, problems meeting balance of payment when in deficit and
debt default, etc. The IMF makes loans with funds invested by its member nations. The
Fund also facilitates the smooth exchange of currency worldwide, and promotes
international trade while keeping an eye on the health of the international economy and
holding regular meetings for its member nations to discuss issues of importance.
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Each member nation in the IMF is given a quota based on factors like the strength of its
economy and the stability of its government. The quota determines the clout the
member nation has in the IMF, and the amount of money which the nation may borrow.
Each country is also assigned a number of Special Drawing Rights (SDRs) on the basis of
its quota. SDRs allow member nations to draw on the IMF's currency reserve, and they
are routinely used in international accounting. In fact, SDRs sometimes come very close
to an international currency.
The work of the IMF is sometimes criticized by people who are concerned about
developing nations. IMF loans usually come with terms known as conditionalities, which
some people feel are exploitative or unproductive. Conditionalities may place what is
perceived as an unfair burden on the beneficiaries of IMF loans, or they may dictate
national policy in a way which does not always benefit the population. Most notably, the
IMF usually mandates Structural Adjustment programs which force its beneficiaries to
open to free trade, sometimes at terms which are not very favorable.
The IMF attempts to stabilize global financial markets by encouraging member nations to
work closely together and to implement laws that encourage economic development and
international trade. IMF member nations can borrow money from the fund, and during
recessionary periods some nations heavily rely on these loans to combat the danger of
economic collapse. The Fund works by controlling and monitoring exchange rates and
serving as a liaison for countries to enter into transactions with each other. The
International Monetary Fund is credited for preventing a number of crises in the global
financial system.
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World Bank Group
Another prominent player in the global system is the World Bank, whose main purpose is
to provide loans to developing countries. The World Bank was created by the United
Nations in an effort to eradicate poverty in poor countries. In addition to financial
resources, the World Bank also lends technical expertise to help countries progress in
areas of education, infrastructure, communications and health. The World Bank aims to
provide funding, take up credit risk or offer favorable terms to development projects
mostly in developing countries that couldn't be obtained by the private sector.
The organizations that make up the World Bank Group are owned by the governments of
ITS 189 member nations, which have the ultimate decision-making power within the
organizations on all matters, including policy, financial or membership issues. Member
countries govern the World Bank Group through the Board of Governors and Boards of
Directors. These bodies make all major decisions for the organizations. To become a
member of the Bank, under the IBRD Articles of Agreement, a country must first join the
International Monetary Fund (IMF). Membership in the World Bank Group's International
Development Association, International Finance Corporation and Multilateral Investment
Guarantee Agency are conditional on membership in the IBRD.
The World Bank was founded in 1944 with the intention of reducing poverty around the
world. In the aftermath of World War II, the World Bank, with funding from nations
including the United States and the United Kingdom, began to write loans to war-ravaged
nations. Since its inception, the World Bank has shifted its attention to tackling poverty
by providing loans to developing nations. The United States has been the primary
international power behind the bank and nominates the president of the bank, who has
been a United States citizen since the organization's start.
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The initial goal of the World Bank was to free the world of poverty. After many years in
existence, the World Bank has undergone criticism for its inability to eliminate the
massive poverty that still rages in many countries. Critics of the World Bank say that the
loans it makes to poor countries result in indebtedness and reliance on foreign aid. One
of the strongest criticisms of the World Bank has been the way in which it is governed.
While the World Bank represents 188 countries, it is run by a small number of
economically powerful countries. These countries (which also provide most of the
institution's funding) choose the leadership and senior management of the World Bank,
and so their interests dominate the bank.
African Development Bank (AfDB)
Kenya Uganda and Tanzania 1969 African Development Bank
The AfDB is a multilateral development finance institution that was founded in 1964 in
order to facilitate the economic development of African nations. The AfDB’s mission is to
fight poverty and improve living conditions on the continent through promoting the
investment of public and private capital in projects and programs that are likely to
contribute to the economic and social development of the region. National governments
can obtain low cost loans from the AfDB to finance projects such as the implementation
of new communication systems, improved sanitation and roads. Although it was founded
as an African entity, the bank now allows non-African nations to join. The United States,
China and Japan are among the non-African member states that have a role in the AfDB.
The AfDB is controlled by a Board of Executive Directors, made up of representatives of
its member countries. The voting power on the Board is split according to the size of each
member's share, currently 60%-40% between African (or regional) countries and non-
regional member countries (donors). The largest African Development Bank shareholder
is Nigeria with nearly 9% of the vote. All member countries of the AfDB are represented
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on the AfDB Board of Executive Directors. Day-to-day decisions about which loans and
grants should be approved and what policies should guide the AfDB’s work are made by
the Board. There has been progress at all levels with regard to democracy, growth and
restoring the macro-economic balances in Africa over the past fifteen years, but half of
sub-Saharan Africa still lives on less than one dollar a day, and AIDS is threatening the
social fabric of the continent.
European Investment Bank (EIB)
Annual investment by the European Investment Bank (EIB) according to main sectors in
2000-2013 and the targets for 2014-16 (€ billions)
The European Investment Bank (EIB) is the European Union's nonprofit long-term lending
institution established in 1958 under the Treaty of Rome. As a "policy-driven bank"
whose shareholders are the member states of the EU, the EIB uses its financing
operations to bring about European integration and social cohesion. Today, the EIB is the
world's largest IFI. It is among the most politically powerful international financial
institutions in existence. An investment bank is a financial firm which specializes in the
sale and management of securities such as stocks and bonds, rather than just handling
cash funds like a traditional bank. Most investment banks handle securities from multiple
nations, and are used by governments, individuals and institutions. Member nations can
obtain loans from the EIB, but its primary objective is to provide economic support for
the EU's political objectives. Within Europe the bank primarily focuses on fostering
cohesion between member nations, but outside Europe the bank helps to encourage
economic reform and energy conservation. The EIB is a publicly owned international
financial institution and its shareholders are the EU member states. The member states
set the bank's broad policy goals and oversee the two independent decision-making
bodies — the board of governors and the board of directors.
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World Trade Organization (WTO)
Map of WTO Members
The World Trade Organization also plays a crucial role in the global financial system. The
organization was created to establish and enforce rules of trade between nations. The
World Trade Organization settles trade disputes and negotiates international trade
agreements in its rounds of talks. Among the various functions of the WTO, these are
regarded by analysts as the most important: It oversees the implementation,
administration and operation of the covered agreements and provides a forum for
negotiations and for settling disputes. The WTO deals with regulation of trade between
participating countries by providing a framework for negotiating trade agreements and a
dispute resolution process aimed at enforcing participants' adherence to WTO
agreements, which are signed by representatives of member governments and ratified by
their parliaments. Additionally, it is the WTO's duty to review and propagate the national
trade policies, and to ensure the coherence and transparency of trade policies through
surveillance in global economic policy-making. Another priority of the WTO is the
assistance of developing, least-developed and low-income countries in transition to
adjust to WTO rules and disciplines through technical cooperation and training.
National income accounting and the balance of payment
The most important macroeconomic variable tracked by economists and the media is the
gross domestic product (GDP). Whether it ought to be so important is another matter
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that is discussed in this chapter. But before that evaluation can occur, the GDP must be
defined and interpreted. This chapter presents the national income identity, which
defines the GDP. It also presents several other important national accounts, including the
balance of payments, the twin-deficit identity, and the international investment position.
These are the variables of prime concern in an international finance course.
Many of the key aggregate variables used to describe an economy are presented in a
country’s National Income and Product Accounts (NIPA). National income represents the
total amount of money that factors of production earn during the course of a year. This
mainly includes payments of wages, rents, profits, and interest to workers and owners of
capital and property. The national product refers to the value of output produced by an
economy during the course of a year. National product, also called national output,
represents the market value of all goods and services produced by firms in a country.
Because of the circular flow of money in exchange for goods and services in an economy,
the value of aggregate output (the national product) should equal the value of aggregate
income (national income). Consider the adjoining circular flow diagram, Figure 2.1 "A
Circular Flow Diagram", describing a very simple economy. The economy is composed of
two distinct groups: households and firms. Firms produce all the final goods and services
in the economy using factor services (labor and capital) supplied by the households. The
households, in turn, purchase the goods and services supplied by the firms. Thus goods
and services move between the two groups in the counterclockwise direction. Exchanges
are facilitated with the use of money for payments. Thus when firms sell goods and
services, the households give the money to the firms in exchange. When the households
supply labor and capital to firms, the firms give money to the households in exchange.
Thus money flows between the two groups in a clockwise direction.
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National product measures the monetary flow along the top part of the diagram—that is,
the monetary value of goods and services produced by firms in the economy. National
income measures the monetary flow along the bottom part of the diagram—that is, the
monetary value of all factor services used in the production process. As long as there are
no monetary leakages from the system, national income will equal national product.
The national product is commonly referred to as gross domestic product (GDP). GDP is
defined as the value of all final goods and services produced within the borders of a
country during some period of time, usually a year. A few things are worth emphasizing
about this definition.
First, GDP is measured in terms of the monetary (or dollar) value at which the items
exchange in the market. Second, it measures only final goods and services as opposed to
intermediate goods. Thus wheat sold by a farmer to a flour mill will not be directly
included as part of GDP since the value of the wheat will be included in the value of the
flour that the mill sells to the bakery. The value of the flour will in turn be included in the
value of the bread sold to the grocery store. Finally, the value of the bread will be
included in the price charged by the grocery when the product is finally purchased by the
consumer. Only the final bread sale should be included in GDP or else the intermediate
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values would overstate total production in the economy. Finally, GDP must be
distinguished from another common measure of national output, gross national product
(GNP).
Briefly, GDP measures all production within the borders of the country regardless of who
owns the factors used in the production process. GNP measures all production achieved
by domestic factors of production regardless of where that production takes place. For
example, if a U.S. resident owns a factory in Malaysia and earns profits on the operation
of that factory, then those profits would be counted as production by a U.S. factory
owner and thus would be included in the U.S. GNP. However, since that production took
place beyond U.S. borders, it would not be counted as the U.S. GDP. Alternatively, if a
Dutch resident owns a factory in the United States, then the fraction of that production
that accrues to the Dutch owner would be counted as part of the U.S. GDP since the
production took place in the United States. It would not be counted as part of the U.S.
GNP, however, since the production was done by a foreign factor owner.
GDP is probably the most widely reported and closely monitored aggregate statistic. GDP
is a measure of the size of an economy. It tells us the total amount of “stuff” the
economy produces. Since most of us, as individuals, prefer to have more stuff rather than
less, it is straightforward to extend this to the national economy to argue that the higher
the GDP, the better off the nation. For this simple reason, statisticians track the growth
rate of GDP. Rapid GDP growth is a sign of growing prosperity and economic strength.
Falling GDP indicates a recession, and if GDP falls significantly, we call it an economic
depression.
For a variety of reasons, GDP should be used only as a rough indicator of the prosperity
or welfare of a nation. Indeed, many people contend that GDP is an inadequate measure
of national prosperity. Below is a list of some of the reasons why GDP falls short as an
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indicator of national welfare.
GDP only measures the amount of goods and services produced during the year. It does
not measure the value of goods and services left over from previous years. For example,
used cars, two-year-old computers, old furniture, old houses, and so on are all useful and
provide welfare to individuals for years after they are produced. Yet the value of these
items is only included in GDP in the year in which they are produced. National wealth, on
the other hand, measures the value of all goods, services, and assets available in an
economy at a point in time and is perhaps a better measure of national economic well-
being than GDP.
GDP, by itself, fails to recognize the size of the population that it must support. If we
want to use GDP to provide a rough estimate of the average standard of living among
individuals in the economy, then we ought to divide GDP by the population to get per
capita GDP. This is often the way in which cross-country comparisons are made.
GDP gives no account of how the goods and services produced by the economy are
distributed among members of the economy. One might prefer a lower GDP with a more
equitable distribution to a higher GDP in which a small percentage of the population
receives most of the product.
Measured GDP growth may overstate the growth of the standard of living since price
level increases (inflation) would raise measured GDP. Thus even if the economy produces
exactly the same amount of goods and services as the year before and prices of those
goods rise, then GDP will rise as well. For this reason, real GDP is typically used to
measure the growth rate of GDP. Real GDP divides nominal (or measured) GDP by the
price level and is designed to eliminate some of the inflationary effects.
Sometimes, economies with high GDPs may also produce a large amount of negative
production externalities. Pollution is one such negative externality. Thus one might prefer
to have a lower GDP and less pollution than a higher GDP with more pollution. Some
groups also argue that rapid GDP growth may involve severe depletion of natural
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resources, which may be unsustainable in the long run.

GDP often rises in the aftermath of natural disasters. Shortly after the Kobe earthquake in
Japan in the 1990s, economists predicted that Japan’s GDP would probably rise more
rapidly. This is mostly because of the surge of construction activities required to rebuild
the damaged buildings. This illustrates why GDP growth may not be indicative of a
healthy economy in some circumstances.
GDP measures the value of production in the economy rather than consumption, which is
more important for economic well-being. As will be shown later, national production and
consumption are equal when a country’s trade balance is zero; however, if a country has
a trade deficit, then its national consumption will exceed its production. Ideally, because
consumption is pleasurable while production often is not, we should use the measure of
national consumption to measure economic well-being rather than GDP.
KEY TAKEAWAYS
GDP is defined as the value of all final goods and services produced within the borders of
a country during some period of time, usually a year.
The following are several important weaknesses of GDP as a measure of economic well-
being:
GDP measures income, not wealth, and wealth is a better measure of economic well-
being.
GDP does not account for income distribution effects that may be important to economic
well-being.
GDP measures “bads” like pollution as well as “goods.”
GDP measures production, not consumption, and consumption is more important to
economic well-being.
The Role of Imports in the National Income Identity

It is important to emphasize why imports are subtracted in the national income identity
because it can lead to serious misinterpretations. First, one might infer (incorrectly) from
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the identity that imports are subtracted because they represent a cost to the economy.
This argument often arises because of the typical political emphasis on jobs or
employment. Thus higher imports imply that goods that might have been produced at
home are now being produced abroad. This could represent an opportunity cost to the
economy and justify subtracting imports in the identity. However, this argument is
wrong.
The second misinterpretation that sometimes arises is to use the identity to suggest a
relationship between imports and GDP growth. Thus it is common for economists to
report that GDP grew at a slower than expected rate last quarter because imports rose
faster than expected. The identity suggests this relationship because, obviously, if
imports rise, GDP falls. However, this interpretation is also wrong.
The actual reason why imports are subtracted in the national income identity is because
imports appear in the identity as hidden elements in consumption, investment,
government, and exports. Thus imports must be subtracted to assure that only
domestically produced goods are being counted. Consider the following details.
When consumption expenditures, investment expenditures, government expenditures,

and exports are measured, they are measured without accounting for where the
purchased goods were actually made. Thus consumption expenditures (C) measures
domestic expenditures on both domestically produced and foreign-produced goods. For
example, if a U.S. resident buys a television imported from Korea, that purchase would
be included in domestic consumption expenditures. Likewise, if a business purchases a
microscope made in Germany, that purchase would be included in domestic investment.
When the government buys foreign goods abroad to provide supplies for its foreign
embassies, those purchases are included in government expenditures. Finally, if an
intermediate product is imported, used to produce another good, and then exported, the
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value of the original imports will be included in the value of domestic exports.
KEY TAKEAWAYS
GDP can be decomposed into consumption expenditures, investment expenditures,
government expenditures, and exports of goods and services minus imports of goods and
services.
Investment in GDP identity measures physical investment, not financial investment.
Government includes all levels of government and only expenditures on goods and
services. Transfer payments are not included in the government term in the national
income identity.
Imports are subtracted in the national income identity because imported items are
already measured as a part of consumption, investment and government expenditures,
and as a component of exports. This means that imports have no direct impact on the
level of GDP. The national income identity does not imply that rising imports cause falling
GDP.
Balance of Payments Accounts: Definitions

LEARNING OBJECTIVES
1. Learn the variety of ways exports and imports are classified in the balance of
payments accounts.
2. Understand the distinction between GDP and GNP.
The balance of payments accounts is a record of all international transactions that are
undertaken between residents of one country and residents of other countries during the
year. The accounts are divided into several subaccounts, the most important being
the current account and the financial account. The current account is often further
subdivided into the merchandise trade account and the service account. These are each
briefly defined in Table 2.3 "Balance of Payments Accounts Summary".
Table 2.3 Balance of Payments Accounts Summary
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and import of services. If SB > 0, the country has a service surplus. If SB < 0, the country
has a service deficit.
Goods and Services Balance
The goods and services balance (or goods balance) can be defined as GSB = EXG&S − IMG&S,
where we record the export and import of both merchandise goods and services. If GSB >
0, the country would have a goods and services (G&S) surplus. If GB < 0, the country has a
G&S deficit. Note that sometimes people will refer to the difference EXG&S − IMG&S as net
exports. Often when this term is used the person is referencing the goods and services
balance.
Here it is important to point out that when you hear a reference to a country’s trade
balance, it could mean the merchandise trade balance, or it could mean the goods and
services balance, or it could even mean the current account balance.
Occasionally, one will hear trade deficit figures reported in the U.S. press followed by a
comment that the deficit figures refer to the “broad” measure of trade between
countries. In this case, the numbers reported refer to the current account deficit rather
than the merchandise trade deficit. This usage is developing for a couple of reasons. First
of all, at one time, around thirty years ago or more, there was very little international
trade in services. At that time, it was common to report the merchandise trade balance
since that accounted for most of the international trade. In the past decade or so, service
trade has been growing much more rapidly than goods trade and it is now becoming a
significant component of international trade. In the United States, service trade exceeds
30 percent of total trade. Thus a more complete record of a country’s international trade
is found in its current account balance rather than its merchandise trade account.
But there is a problem with reporting and calling it the current account deficit because
most people don’t know what the current account is. There is a greater chance that
people will recognize the trade deficit (although most could probably not define it either)
than will recognize the current account deficit. Thus the alternative of choice among
commentators is to call the current account deficit a trade deficit and then define it
briefly as a “broad” measure of trade.
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A simple solution would be to call the current account balance the “trade balance” since
it is a record of all trade in goods and services and to call the merchandise trade balance
the “merchandise goods balance,” or the “goods balance” for short. I will ascribe to this
convention throughout this text in the hope that it might catch on.
GDP versus GNP
There are two well-known measures of the national income of a country: GDP and GNP.
Both represent the total value of output in a country during a year, only measured in
slightly different ways. It is worthwhile to understand the distinction between the two
and what adjustments must be made to measure one or the other.
Conceptually, the gross domestic product (GDP) represents the value of all goods and
services produced within the borders of the country. The gross national product (GNP)
represents the value of all goods and services produced by domestic factors of
production.
Thus production in the United States by a foreign-owned company is counted as a part of
U.S. GDP since the productive activity took place within the U.S. borders, even though
the income earned from that activity does not go to a U.S. citizen. Similarly, production
by a U.S. company abroad will generate income for U.S. citizens, but that production
does not count as a part of GDP since the productive activity generating that income
occurred abroad. This production will count as a part of GNP though since the income
goes to a U.S. citizen.
The way GDP versus GNP is measured is by including different items in the export and
import terms. As noted above, GDP includes only exports and imports of goods and
services, implying also that GDP excludes income payments and receipts and unilateral
transfers. When these latter items are included in the national income identity and the
current account balance is used for EX − IM, the national income variable becomes the
GNP. Thus the GNP measure includes income payments and receipts and unilateral
transfers. In so doing, GNP counts as additions to national income the profit made by U.S.
citizens on its foreign operations (income receipts are added to GNP) and subtracts the
profit made by foreign companies earning money on operations in the U.S. (income
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payments are subtracted).
KEY TAKEAWAYS
The trade balance may describe a variety of different ways to account for the difference
between exports and imports.
The current account is the broadest measure of trade flows between countries
encompassing goods, services, income payments and receipts, and unilateral transfers.
The merchandise trade balance is a more narrow measure of trade between countries
encompassing only traded goods.
Net exports often refer to the balance on goods and services alone.
GDP is a measure of national income that includes all production that occurs within the
borders of a country. It is measured by using the goods and services balance for exports
and imports.
GNP is a measure of national income that includes all production by U.S. citizens that
occurs anywhere in the world. It is measured by using the current account balance for
exports and imports.
The financial account balance measures all exports and imports of assets, which means
foreign purchases of domestic assets and domestic purchases of foreign assets.
Exchange rates
An exchange rate is the value of one nation's currency versus the currency of another
nation or economic zone. For example, how many U.S. dollars does it take to buy one
euro? As of July 31, 2020, the exchange rate is 1.18, meaning it takes $1.18 to buy €1.1
KEY TAKEAWAYS
An exchange rate is the value of a country's currency vs. that of another country or
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economic zone.
Most exchange rates are free-floating and will rise or fall based on supply and demand in
the market.
Some currencies are not free-floating and have restrictions.
Types of Exchange Rates
Free Floating
A free-floating exchange rate rises and falls due to changes in the foreign exchange
market.
Restricted Currencies
Some countries have restricted currencies, limiting their exchange to within the
countries' borders. Also, a restricted currency can have its value set by the government.
Currency Peg
Sometimes a country will peg its currency to that of another nation. For instance, the
Hong Kong dollar is pegged to the U.S. dollar in a range of 7.75 to 7.85.2 This means the
value of the Hong Kong dollar to the U.S. dollar will remain within this range.
Onshore Vs. Offshore

Exchange rates can also be different for the same country. In some cases, there is an
onshore rate and an offshore rate. Generally, a more favorable exchange rate can often
be found within a country’s border versus outside its borders. China is one major
example of a country that has this rate structure. Additionally, China's yuan is a currency
that is controlled by the government. Every day, the Chinese government sets a midpoint
value for the currency, allowing the yuan to trade in a band of 2% from the midpoint.3
City of Olongapo
GORDON COLLEGE
Tel. No. (047) 224-2089 loc. 314
Spot vs. Forward

Exchange rates can have what is called a spot rate, or cash value, which is the current
market value. Alternatively, an exchange rate may have a forward value, which is based
on expectations for the currency to rise or fall versus its spot price. Forward rate values
may fluctuate due to changes in expectations for future interest rates in one country
versus another. For example, let's say that traders have the view that the eurozone will
ease monetary policy versus the U.S. In this case, traders could buy the dollar versus the
euro, resulting in the value of the euro falling.
Quotation
Typically, an exchange rate is quoted using an acronym for the national currency it
represents. For example, the acronym USD represents the U.S. dollar, while EUR
represents the euro. To quote the currency pair for the dollar and the euro, it would be
EUR/USD. In this case, the quotation is euro to dollar, and translates to 1 euro trading for
the equivalent of $1.13 if the exchange rate is 1.13. In the case of the Japanese yen, it's
USD/JPY, or dollar to yen. An exchange rate of 100 would mean that 1 dollar equals 100
yen.
1:15
Exchange Rate: My Favorite Term
Real World Example of How Exchange Rates Work
John is traveling to Germany from his home in New York and he wants to make sure he
has 200 dollars’ worth of euros when he arrives in Germany. He goes to the local
currency exchange shop and sees that the current exchange rate is 1.20. It means if he
exchanges $200, he will get €166.66 in return.
In this case, the equation is: dollars ÷ exchange rate = euro

City of Olongapo
GORDON COLLEGE
Tel. No. (047) 224-2089 loc. 314
-or-
$200 ÷ 1.20 = €166.66
John has returned from the trip, and he now wants to exchange his euros for dollars. He
never used his €166.66 and now sees the exchange rate has dropped to 1.15. He
exchanges his €166.66, and because the rate fell when he was away, he receives only
$191.67. The reason he gets less despite having the same value of euros is that the euro
weakened versus the dollar during his time away.
In this case, the equation is the opposite: euros x exchange rate = dollars
-or-
€166.66 x 1.15 = $191.66
However, not all currencies work the same way. For example, the Japanese yen is
calculated differently. In this case, the dollar is placed in front of the yen, as in USD/JPY.
The equation for USD/JPY is: dollars x exchange rate = yen
Let's say someone traveling to Japan wants to convert $100 into yen, and the exchange
rate is 110. The traveler would get ¥11,000. To convert yen back into dollars one needs
to divide the amount of the currency by the exchange rate.
$100 x 110 = ¥11,000.00

City of Olongapo
GORDON COLLEGE
Tel. No. (047) 224-2089 loc. 314
-or-
¥11,000.00/110= $100

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Republic of the Philippines

DETAILED LEARNING MODULE

 Discuss the National income accounting and the balance of payment

III. Topics and Key Concepts

 View on line video included on the power point presentation

Introduction Of Global Finance

The Global Financial System Growing Cross-Border Links (GFS)

A financial system refers to a set of components and mechanisms, such as monetary

many individual country’s economies.

International Economic Actors The GFS

research and statistics publications.

A. International Monetary Fund (IMF)

The International Monetary Fund (IMF) is an international organization headquartered in

World Bank Group

African Development Bank (AfDB)

Kenya Uganda and Tanzania 1969 African Development Bank

European Investment Bank (EIB)

World Trade Organization (WTO)

Map of WTO Members

National income accounting and the balance of payment

indicator of national welfare.

resources, which may be unsustainable in the long run.

The Role of Imports in the National Income Identity

When consumption expenditures, investment expenditures, government expenditures,

Balance of Payments Accounts: Definitions

payments are subtracted).

Onshore Vs. Offshore

Spot vs. Forward

In this case, the equation is: dollars ÷ exchange rate = euro

$200 ÷ 1.20 = €166.66

€166.66 x 1.15 = $191.66

The equation for USD/JPY is: dollars x exchange rate = yen

$100 x 110 = ¥11,000.00

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