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September 1992: Collapse of the ERM (Exchange Rate Mechanism)

September 1992: Collapse of the ERM (Exchange Rate Mechanism). German Unification  Inflationary Pressures BUBA hangs tough  High i  High DM Others keep up  High i  High Unemployment/Stagnation Speculation they’ll cave  Capital Flight Italy, UK, Sweden Cave.

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September 1992: Collapse of the ERM (Exchange Rate Mechanism)

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  1. September 1992: Collapse of the ERM (Exchange Rate Mechanism) German Unification  Inflationary Pressures BUBA hangs tough  High i  High DM Others keep up  High i  High Unemployment/Stagnation Speculation they’ll cave  Capital Flight Italy, UK, Sweden Cave

  2. International Factor Movements From Low Wage  To High Wage From Low Return  To High Return From Low Productivity  High Productivity  Net Gain to World Economy • Factor flows can substitute for merchandise trade … and vice versa • But you can’t get your Las Vegas lawn mowed in Mexico

  3. Talk’n’ MNE / TRC • Vertical Integration • Horizontal Integration • Conglomeration: No integration at all • Exxon Copper • Exxon Enterprises

  4. Talk’n’ MNE / TRC Why FDI? Demand Side Motives • Be close to customers • Stifle potential competitors Supply Side Motives • Natural Endowments • Global Conveyor Belt • Cheap, Productive Labor • Government Incentives • Rush to the Bottom • Squeeze Under Tariff Barrier

  5. Capital Account and FDI TRADE DEFICIT CAPITAL INFLOWS Government Securities Bank Deposits Bonds / Equities FDI Increasing Comfort Level

  6. FDI Issues (?!?) Good jobs to foreign owners? Good jobs to cheap foreign labor? Trojan Horse: They’ll steal our smarts? • Demonstration effect • Competitive effect Stay ahead of the curve!!!

  7. Labor Flows: Emigration/Immigration The Theory Reduced Wage Differentials Improved Allocation of Labor Increased World Income

  8. Labor Flows: Emigration/Immigration The US Experience More open to low skilled immigrants • Guest worker programs • Worsened income distribution Brain Drain  Complementary Workers Enhance immigrant productivity • Education • Opportunities for entrepreneurs REVITALIZE AMERICA ! Remittances / Experience for Source Nations

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