International bussiness the challenge of global competition 11e chapter 05

chapter five
Understanding the
International Monetary System

McGraw-Hill/Irwin
International Business, 11/e

Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.


Learning Objectives

• Explain the functioning of the gold standard
• Describe the purposes of the IMF
• Appreciate the accomplishments of Bretton
Woods system and the ensuing developments
shaping the world monetary system
• Describe the purpose of the World Banks
• Discuss the purpose of the Bank for
International Settlements
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Learning Objectives
• Discuss the floating exchange rate system
• Describe the development of the euro
• Explain the role of the Balance of Payments
(BOP)
• Discuss the major BOP accounts
• Explain the use of Special Drawing Rights

(SDRs)

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Gold Standard
• Gold Standard
– The use of gold at an established number of units
per currency

• Bretton Woods
– The New Hampshire town where treasury and
central bank representatives met near the end of
World War II to establish the IMF, the World Bank,
and the gold exchange standard

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International Monetary Fund
• International Monetary Fund (IMF)
– Institution that coordinates multilateral monetary
rules and their enforcement

• Triffin paradox
– The concept that a national currency that is also a
reserve currency will eventually run a deficit, which
eventually inspires a lack of confidence in the
reserve currency and leads to a financial crisis.

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World Bank
• World Bank
– Institution that focuses on funding of development
projects

• Bank for International Settlements
– Institution that is the central bank for central
bankers

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Currency Exchange Rate Systems
• Fixed currency exchange rates
– Rates that governments agree on and undertake to
maintain

• Floating currency exchanges rates
– Rates that are allowed to float against other
currencies and are determined by market forces

• Jamaica Agreement
– The 1976 IMF agreement that allows flexible
exchange rates among members

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Current Currency Exchange Rate
Arrangements
• Exchange arrangements with no separate
legal tender
• Currency board arrangements
• Other conventional fixed peg arrangements
• Pegged exchange rates within horizontal
bands

5-9


Current Currency Exchange Rate
Arrangements
• Crawling pegs
• Exchange rates within crawling bands
• Managed floating with no preannounced path
for the exchange rate
• Independently floating exchange rates

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Euro

• Currency of the European Union
• 12 EU members have joined the European
Monetary Union

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BOP Accounts
Table 5.1
• Current account
– Records a country’s exports and imports in goods
and services
• Goods or merchandise account
• Services account
• Unilateral transfers

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BOP Accounts
• Capital account
– Records the net changes in a nation’s international
financial assets and liabilities
• Direct investments
• Portfolio Investments
• Short-term capital flows

• Official Reserves account
– Records the assets held by the government; gold,
foreign currencies, and accounts in foreign banks; a
balance of the country’s foreign currency
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Table 5.1 U.S. International
Transactions (millions of dollars)

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Special Drawing Rights

• Special Drawing Rights (SDR)
– An international reserve asset established by the
IMF
– The unit of account for the IMF and other
international organizations

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