Notes, summaries, assignments, exams, and problems for Economy

Theme II: The Development of the Global Economy

5. Japan's Post-War Economic Growth

I. Role of Government

• Growth-driven policies and focused leadership
  • The Liberal Democratic Party (LDP) mostly ruled after 1955.
  • A cohesive unity of bureaucrats and politicians made up competent policymakers focused on achieving economic development and self-reliance.
  • Tight policy coordination was known as the "Iron Triangle."
  • The Yoshida Doctrine was implemented in the early 1950s.
  • Ikeda's Income Doubling Plan was introduced in the early 1960s.
  • Sato's Three Non-Nuclear Principles were established in the early 1970s.
• Heavy government involvement in the free market
  • The Ministry of International Trade and Industry (MITI) decided, charted, and planned Japan's industrial and

International Finance Fundamentals

Three Reasons International Finance is Special:

• Political Risk: Foreign expropriation, unstable regimes, and tariffs.
• Exchange Rate Risk: Currency value changes significantly affect cash flows.
• Market Imperfections: Barriers, taxes, and information gaps.

Multinational Corporation Goals:

• Maximize global shareholder value, not just domestic.

Currency Depreciation Effects:

• ↓ Currency → Exports ↑, Imports ↓.

Currency Appreciation Effects:

• ↑ Currency → Exports ↓, Imports ↑.

Understanding Financial Contagion:

• Economic crises spread to other countries (e.g., Greek debt crisis, Asian currency crisis).

Evolution of Global Monetary Systems

Bimetallism (Pre-1875):

• Both gold and silver backed currencies.
• Problem: Gresham’s

Agricultural Income 2(1A)

Bacha F. Guzdar V. CIT - Dividend income from agricultural company
Sakarlal Naranlal V. CIT - Galka and Loofah
CIT Poona V. HG Date - Jaggery sold since no sugar mill
CIT V. Raja Benoy Kumar Sahas Roy - Spontaneous growth in forest 1. Primary and secondary
Premier Construction Co. Ltd. v. C.I.T. - Part income 10% from an agricultural company not agricultural income.
C.I.T. v. Maddi Venkatasubbayya - Income derived from selling processed agricultural products (tobacco) not agricultural income.

Application and Diversion

CIT V. Sital Dass Tirathdas - Consent decree - alimony
CIT V. Sunil J. Kinariwala - Trust
Raja Bejoy Singh Dudhuria V. CIT - Step mother

Income from House Property

C.I.T., West Bengal v. Biman Behari Shaw, Shebait... Continue reading "Understanding Agricultural Income and Related Tax Cases" »

Forward Exchange (EUR/SEK):

x = Exchange rate * (1 + SEK interest rate) / (1 + EUR interest rate).

CAP: Establishes an upper limit on interest rates. Floor: Establishes a lower limit on interest rates. EBITDA: Higher than net income. ROE: Return on Equity. For the equity the company provides, it generates an operating income of X annually.

Theoretical Semiannual Euribor:

(1 + First-half rate) * (1 + Second-half rate) = (1 + Annual rate).

Nominal Exchange Rate: (Nominal Exchange Rate * Domestic Price Level) / Foreign Price Level.

Spot Market: Notional amount * (1 / Current exchange rate - 1 / Initial exchange rate). Positive value means that in 9 months the spot market will be more expensive.

FXA (Foreign Exchange Agreement): Notional amount * (1... Continue reading "Understanding Forex, Financial Ratios, and Country Competitiveness" »

Money and Monetary System

• Money: An asset that serves three functions: medium of exchange, store of value, and unit of account.
• Fiat Currency: Money issued by a government with no physical backing (e.g., euro, dollar).
• Fiduciary Currency: Money based on trust, not intrinsic value (e.g., Bitcoin, checks).
• Ledger: An accounting record showing debts and transactions.
• Unit of Account: Allows expressing the price of goods/services (e.g., a coffee costs €2).

Cryptography

• Hash: A mathematical function that converts data into a unique and irreversible digital fingerprint.
• Asymmetric Cryptography: Uses a pair of keys (public and private) to encrypt and decrypt messages.
• Digital Signature: Proves that a message was sent by a specific user and has not been modified.

Competitiveness and Trade

Nominal Exchange Rates

When our currency's value increases, our competitiveness decreases, and importations increase in relative terms.

Price Levels

• Our Country: If prices in our country increase, our exports decrease, and imports increase.
• Foreign Country: If prices in foreign countries increase, our competitiveness increases, benefiting our exports, and our imports decrease.

Foreign Exchange Market

• Price Determination: The exchange rate between countries is established based on supply and demand.
• Hedging: Protection against currency fluctuations, safeguarding investors and businesses from losses due to currency appreciation or depreciation.
• International Finance: Countries can lend and borrow money by converting currencies.

Foreign Exchange Markets and Risk Management

Sectors of the Foreign Exchange Market

• Spot Market
• Forward Market
• Currency (Market)

Determinants of Foreign Exchange Rates

1. Interest Rate Differentials
2. Inflation Rate Differentials
3. Government Policies
4. Market Expectations
5. Investment Opportunities
6. Speculations

Risks Faced by International Companies (Exposure Types)

• Transaction Exposure Risk
• Economic Exposure Risk
• Translation Exposure Risk

Methods of Managing Foreign Exchange Risk

1. Exposure Netting
2. Forward Exchange Contracts
3. Currency Futures and Options
4. Currency Swaps Agreements
5. Foreign Currency Bank Accounts
6. Appropriate Capital Structure

Foreign Exchange Terminology

1. Exchange Rates
2. Spot Rate
3. Forward Rate
4. Direct Quote
5. Indirect Quote
6. Two-Way Quote
7. Bid Rate
8. Offer Rate
9. American Quote
10. European

Equity and Financial Concepts

Free Cash Flow (FCF)

FCF_t = EBIT + DEP - CAPEX - ΔWC - TAX

ΔWC = Δreceivables + Δinventories - Δpayables + Δother items

TAX = (EBIT-Y_t)*T = EBIT*T - Y_tT

FCFE = FCF_t - Y_t - PRINC_t

FCF_t^u = FCF_t - Y_tT

Y = k_dD₀ (interest paid is cost of debt*value of debt)

Standard WACC

k_s=(1-L)k_e + Lk_d(1-T) | Use Standard WACC with FCF_u | ITS is not included in both FCF_u & k_s | Need Constant Target Leverage Ratio (L)

k_e = reflects operating and financial risk faced by investors | k_u = unlevered cost of equity (if firm had no debt), reflects operating risk

V₀ = U₀ + I₀ (Enterprise Value = value of operations + value of ITS) | Leave space for Standard WACC equation if k_its = k_d OR k_its = k_u

Standard WACC model implicitly assumes k_its... Continue reading "Understanding Equity, WACC, and Discount Rates in Finance" »

Representation of Preferences by Indifference Curves

An indifference curve shows the consumption baskets that yield the same level of satisfaction to the consumer. The consumer is indifferent between various combinations within the indifference curve. The slope at any point on an indifference curve is equal to the rate at which consumers are willing to substitute one good for another. This relationship is called the marginal rate of substitution (MRS). The rate at which a consumer is willing to trade Pepsi for pizza depends on who has more hunger or thirst, which depends in turn on how much pizza and Pepsi they have.

As a consumer prefers a larger quantity of goods, they prefer higher indifference curves to lower ones.

Four Properties of Indifference

Central Banking: Concept and Meaning

What is Central Banking?

Central Banking refers to the functions and activities carried out by a central bank, which is the main monetary authority of a country responsible for managing the currency, money supply, and interest rates. It acts as a regulator and supervisor of the banking system and plays a crucial role in the economic and financial stability of the country.

Meaning of a Central Bank

A Central Bank is a government-owned or state-owned institution that controls the issuance of currency and regulates the banking system within a country. It does not typically engage in normal banking activities with the public but works primarily with commercial banks and the government.

Key Features of a Central Bank