Lesson One | Lesson Two | Lesson Three | Lesson Four | Lesson Five
Objectives:
To understand the basic nature of international financial capital flows
Teaching Notes:
International capital flows are affected by the interest rate differentials
between countries, the exchange rate and expectations of the people in
the relevant countries.
Focus Activity:
Students will learn what forms capital flows take and what factors
will cause capital to flow in or out of a country.
Directions:
(1) Divide the class into groups of 4-6 students.
(2) Give the groups balance of payments schedules from their country,
a lesser developed country and a developed country.
(3) Have them list specific differences in the relative sizes of the
various components of the capital account.
(4) Give them the following scenarios and have them explain what may
happen to the relative size of the components of the capital flows in each
country.
a) The exchange rate between
the developed and lesser developed country changes to favor the lesser
developed country.
b) The exchange rate between
your country and the developed country changes in favor of the developed
country.
c) People in your country
become highly optimistic about increases in the value of your currency
relative to that of the lesser developed country.
d) Government policies in
the developed country push that country's interest rate lower than that
in your country (adjusted for all other factors).
e) The political climate
in the lesser developed country worsens.
Questions:
(1) What differences do you see in the various components of the capital
accounts you were given?
(2) Where will the capital inflows and outflows occur in each of the
scenarios?
(3) What are some of the benefits to capital inflows to your country
and what would some of the disadvantages be?
Answers to Questions
(1) The answers to this question will vary depending on the specific
countries used.
(2) The directions should be as follows:
a) Capital should flow toward
the lesser developed country and away from the developed country.
b) Capital should flow toward
the developed country and away from yours.
c) Capital should flow toward
your country and away from the LDC.
d) Capital should flow toward
your country and away from the developed country.
e) Capital will flow away
from the LDC.
(3) The major positive impact is that more capital funds will be available for projects within the nation. The major negative impact is that interest rates will be reduced due to an increase in the supply of capital funds, so that people that save domestically will see interest rates begin to lower and therefore will receive smaller returns. This development will have the tendency for capital funds to be attracted to other nations in the near future.
Extensions and variations:
Use a variety of different countries and different examples. You could
use actual cases of exchange rate and interest rate fluctuations from current
events.
Suggested texts and Supplemental Resources:
Most international economics textbooks and principles of economics
textbooks will cover this material. Data are available from national and
international agencies.
Objectives:
To understand the role of the World Bank in international lending
Teaching Notes:
The primary goal of the World Bank is to reduce poverty throughout
the world through its lending practices. The World Bank has two primary
lending divisions: the International Bank for Reconstruction and Development
(IBRD) and the International Development Association (IDA). The former
lends only to credit-worthy borrowers who pay market interest rates and
hold to strict repayment schedules. The capital for the loans comes from
contributions of the member nations and from borrowing in the international
capital markets. The IDA loans to the poorest countries, requires no interest
on the loans.
Focus Activity:
Students will examine the documents of the World Bank to determine
the specific types and amounts of lending and the purposes for this lending.
Directions:
(1) Divide the class into groups of 4-6 students.
(2) Give each group a regional perspective section of the World Bank's
Annual Report. (the report is divided by geographic region)
(3) Ask them to list the major lending activities for their group over
time. Have them note changes over time.
(4) Bring the class together as a group and have them compare and contrast
the activities of the World Bank in different areas? Rank the areas in
terms of total World Bank lending dollars.
Questions:
(1) What activities is the World Bank sponsoring in each area of the
world? How much lending is done in each region in dollars? Why is the ranking
the way it is?
(2) How has the lending changed over time in each region? How does
this change reflect the world views on poverty and development issues?
Answers to Questions:
(1) The answer will vary depending on which regions are used. The ranking
will likely reflect the relative degree of poverty in the region.
(2) The answers will again depend on the regions considered. The students
may look at changes in women's issues, health concerns, environmental concerns
to answer the second part.
Extensions and variations:
(1) Use a single regional perspective as part of a geography or social
studies lesson. Have each group do the same perspective and look at different
features to report to the class as a whole.
(2) Give each student an individual role (make up a set of characters
involved in the economic scene in your country) and have them develop a
personal wish list for what they want from the World Bank. Then have them
look at the published reports and statistics to evaluate how near or far
the World Bank has actually come to meeting those wishes. The work can
be done in oral or written form.
Suggested texts and Supplemental Resources:
World Bank Annual Report (also available on the Web)
Objectives:
To understand the role of private commercial banks in international
lending.
Teaching Notes:
Private commercial banks are active participants in the international
banking process. This process can take two forms. The domestic bank can
make loans to foreign entities such as governments and businesses. The
bank can also open a facility in a foreign country and make loans to the
host country and even back to its domestic base.
Focus Activity:
Students will examine the types of international lending that occurs
in their country. They will examine the restrictions placed on international
banking by the government and compare these with other selected country
restrictions. They will then discuss how restrictions can affect the amount
of international banking activity in a county and the overall level of
economic activity in the country.
Directions:
(1) Divide the class into groups of 4-6 students.
(2) Hand out examples of annual reports of commercial banks from their
country. If such reports are not available, then a government summary of
banking activity can be used. The summary should include both domestic
and international operations. If available, give the students a list of
foreign-owned banking concerns operating in their country.
(3) Along with the annual reports, give the students a list of any
banking regulations that might relate to international operations in their
country. Give them also lists of regulations (or a summary of such regulations)
in other countries. Use both developed and lesser developed countries as
available.
(4) Have the students compare the regulations with the regulations
between countries. Rank the countries from highest to lowest on regulations.
(5) Have the students list positive and negative consequences of international
banking for the commercial banks involved and for the economy of the countries
involved.
Questions:
(1) How active are the domestic banks in international lending? Do
domestic banks operate in other countries? Do other countries operate banks
in your country more or less than your country operates in foreign countries?
Why would this be the case?
(2) How important are restrictions on international banking in determining
the level of such activities in your country? How do your country's restrictions
compare with those in other countries, especially in those with whom your
country trades?
(3) How can international banking help a country's economy? Are there
sectors of the economy which could be harmed by international banking?
Answers to Questions:
(1) The answers will depend on the countries involved. If the domestic
country operates less than others it may be due to the size and development
of their banking system relative to those country's operating in this country.
(2) Restrictions vary between countries. But generally the more restrictions
placed on international banking activities of domestic and/or foreign-owned
banks, the less international banking activity is done. It may be the case
that even though one country has restrictions, the restrictions may be
low compared to those in other countries. So banks may find it easier to
do business internationally in the foreign country than from its own country.
(3) By providing more opportunity for funds, international banking
can be beneficial. However, domestic banks may be harmed by the increased
competition.
Extensions and variations:
Specific countries may be used to coincide with geography. Looking
at the legal restrictions on banking may fit well with some political science
curricula.
Suggested texts and Supplemental Resources:
Several sites exist on the Internet which give international banking
data.
Objectives:
To understand the role of the International Monetary Fund in international
banking and how its requirements influence domestic economies.
Teaching Notes:
The purpose of the IMF is to assist countries in resolving temporary
balance of payments disequilibrium conditions. Before approving a loan
to a country, the IMF requires that the country agree to a set of comprehensive
economic policies and targeted economic goals to qualify for the loan.
For the typical balance of payments problems (large trade deficits and
capital outflow), the economy would have to increase exports, reduce imports,
cut the domestic budget deficit, and/or stabilize inflation (depending
on the problems at hand). Success in these areas will begin to attract
foreign capital.
Focus Activity:
Students examine their own balance of payments schedule to determine
any problems which could lead to IMF intervention. Students will then suggest
methods to "fix" the balance of payments using IMF guidelines above. Finally
they will look at the effects on their economies of such a "fix."
Directions:
(1) Divide the class into groups of 4-6 students.
(2) Give the students the balance of payments for their countries.
(3) Have the students determine if there is any significant problem
(capital outflows, trade deficits, etc)
(4) Have the students provide ways to correct the balance of payments
problems.
(5) Ask the students to list the ways, both positive and negative,
their domestic economy will be affected by the corrections in number 4.
Questions:
(1) What problems exist in our balance of payments? Give some reasons
for these problems.
(2) What are your suggestions for correcting the problems?
(3) How will each suggestion impact the domestic economy?
(4) Given your answers to 3, should we proceed with your suggestions?
Why or why not?
Answers to Questions:
(1) The answers to the first part will depend on the country. The reasons
may be related to the economy, such as relatively low interest rates (capital
outflows), high income (trade deficit), political instability (capital
outflows).
(2) Suggestions would include monetary and fiscal policy changes, reductions
of trade restrictions, policies to improve productivity.
(3) Frequently the suggestions will cause some problems in the domestic
economy. The problems will be country-specific.
(4) Students will need to decide if the long run improvements in the
international sector are worth the costs to the domestic economy.
Extensions and variations:
Students could compare several different balance of payments tables
from a variety of different countries--developed and lesser developed,
neighboring countries, trading partners or ones they are studying in geography.
Suggested texts and Supplemental Resources:
Information from IMF on balance of payments for selected countries.
Objectives:
To understand the role of direct foreign aid in the international banking
process.
Teaching Notes:
Foreign aid can take the form of loans or grants by the government
of one country to the government or agencies of another. Some types of
aid are more effective than others. For example, by sending mass quantities
of food to poor countries, the price of food in the country will fall and
less will be produced the next year. Food for work programs have proved
more successful in Ethiopia and Zimbabwe, where people do work on construction
of dams and wells in exchange for food. Giving people cash allows them
to purchase food at the market price ensuring that producers will continue
to produce in the future.
Focus Activity:
Students will determine and evaluate the types of foreign aid in which
their country is involved, whether as a donor or as a recipient of aid.
Directions:
(1) Divide the class into groups of 4 students. Students should be
given a role: Aid Donor; Aid Recipient; Aid Worker; International Economist
as Advisor.
(2) Give the students articles and other documents on the types of
foreign aid given or received by their country. These could be loans or
grants or gifts of goods and services.
(3) Have the students determine in their roles what the goals are for
each type of aid provided or received. Then have the students discuss in
their groups whether they believe the various types are effective in achieving
this goal. The goals could be issues such as poverty reduction, economic
growth, improving education, health care.
(4) Have the students give alternative uses to the funds allocated
to/from the foreign aid.
Questions:
(1) What are the goals of each type of aid presented to you?
(2) Does the type of aid achieve its goals? Why or why not? If not,
why was this type of aid provided?
(3) What other alternatives did you think of which could achieve the
goals more efficiently and effectively?
Answers to Questions:
(1) The goals would be reducing poverty, improving health care, education,
equality, generally improving growth. The goals will be dependent on the
types of aid.
(2) The answer will depend on the answers to #1 and the type of aid.
The aid may be provided in this form because it is easy to distribute or
there is lack of planning or other such weaknesses.
(3) The alternatives will be varied. Encourage students to be creative
here.
Extensions and variations:
The students could examine the aid to other countries, especially the
poorest to determine the types and effectiveness of foreign aid there.
They could also look at aid in different regions of the world as they complete
a geography lesson.
Suggested texts and Supplemental Resources:
IMF and World Bank publications are good here. Also the government
may publish information on the amount of foreign aid received or provided.