International Business - Chapter 7: The international monetary system and the balance of payments

"International Business - Chapter 7: The international monetary system and the balance of payments" discuss the role of the international monetary system in promoting international trade and investment, explain the evolution and functioning of the gold standard, explain the evolution of the flexible exchange rate system
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International Business - Chapter 7: The international monetary system and the balance of payments Chapter 7: The International Monetary System and the Balance of Payments International Business, 4th Edition Griffin & Pustay7-1 ©2004 Prentice Hall Chapter Objectives_1 Discuss the role of the international monetary system in promoting international trade and investment Explain the evolution and functioning of the gold standard Explain the evolution of the flexible exchange rate system7-2 ©2004 Prentice Hall Chapter Objectives_2 Summarize the role of the World Bank Group and the International Monetary Fund in the post-World War II international monetary system established at Bretton Woods Describe the function and structure of the balance of payments accounting system Differentiate among the various definitions of a balance of payments surplus and deficit7-3 ©2004 Prentice Hall The Gold Standard Countries agree to buy or sell their paper currencies in exchange for gold on the request of any individual or firm and to allow the free export of gold bullion and coins Adopted by the U.K. in 1821 Created a fixed exchange rate7-4 ©2004 Prentice Hall Exchange Rates Exchange rate: price of a one currency in terms of a second currency Fixed exchange rate system: price of a given currency does not change relative to each other currency – Under the gold standard, each country pegged the value of its currency to gold7-5 ©2004 Prentice Hall The Collapse of the Gold Standard Economic pressures of WWI Countries suspended pledges to buy or sell gold at currencies’ par values Gold standard readopted in 1920s Dropped during Great Depression British pound allowed to float in 1931 – Float: value determined by supply and demand7-6 ©2004 Prentice HallMap 7.1 The British Empire in 19137-7 ©2004 Prentice Hall Figure 7.1 The Contraction of World Trade, 1929-19337-8 ©2004 Prentice Hall The Bretton Woods Era 44 countries met in Bretton Woods, New Hampshire in 1944 Goal: to create a postwar economic environment to promote worldwide peace and prosperity Renewed gold standard on modified basis (dollar-based) Created International Bank for Reconstruction and Development and International Monetary Fund7-9 ©2004 Prentice Hall International Bank for Reconstruction and Development World Bank Goal 1: to help finance reconstruction of European economies – Accomplished in mid 1950s Goal 2: to build economies of the world’s developing countries7-10 ©2004 Prentice Hall Figure 7.2 Organization of the World Bank Group International Bank for Reconstruction and Development Makes hard loans; $15 billion annually International International Multilateral Development Finance Investment Association Corporation Guarantee Offers Promotes Agency soft loans; private Provides $7 billion sector political risk annually development insurance7-11 ©2004 Prentice Hall Objectives of the International Monetary Fund_1 To promote international monetary cooperation To facilitate the expansion and balanced growth of international trade To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation To assist in the establishment of a multilateral system of payments7-12 ©2004 Prentice Hall Objectives of the International Monetary Fund_2 To give confidence to members by making the general resources of the IMF temporarily available to them and to correct maladjustments in their balances of payments To shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members7-13 ©2004 Prentice Hall Membership in the IMF Open to any country willing to agree to rules and regulations 184 country members as of August 2003 Membership requires payment of a quota7-14 ©2004 Prentice Hall Relevance of the IMF Quota Quota size reflects global importance of country’s economy and political considerations The quota – determines voting power – serves as part of official reserves – determines country’s borrowing power7-15 ©2004 Prentice Hall Brazilian students protesting the IMF conditions for a $30 billion loan7-16 ©2004 Prentice Hall The End of the Bretton Woods System Susceptible to speculative “runs on the bank” U.S. $ became only source of liquidity necessary to expand international trade Triffin Paradox: – foreigners increased holdings of dollars – Increased holdings decreased faith in U.S ability – Increased demand for redeeming dollars for gold IMF created special drawing rights (SDRs) – paper gold Bretton Woods system ended August 15, 19717-17 ©2004 Prentice Hall Post-Bretton Woods System Most currencies began to float Value of U.S. $ fell relative t ...