Chapter Discussion

Understand the historical and present uses and attractiveness of gold.
Since the earliest recorded times, gold has held an allure. People have used it, and continue to use it, for many purposes, including jewelry, coinage, store of value, and protection against inflation and political unrest.

Explain the developments shaping the world monetary system from the end of World War II to the present.
The gold exchange standard, established at Bretton Woods after World War II, worked until the 1970s, when it collapsed due to inflation and the surplus of U.S. dollars held outside the United States.

Understand balance of payments (BOP).
BOP accounts measure and compare the amount of money coming into a country with the amount going out.

Compare the relative strengths and weaknesses of currencies and reasons for them.
Causes for a currency’s relative strengths and weaknesses include relative inflation, balance of payments, political developments, and confidence in the country’s leaders.

Understand how “Big MacCurrencies” and the purchasing power parity theory are related.
A Big Mac hamburger is supposed to be the same at every McDonald’s around the world. Therefore, according to the PPP theory, its cost in the currency of one country compared with its cost in the currency of a second country should equal the exchange rate between those currencies.

Identify the major foreign currency exchange (Fx) markets of the world.
London is the largest Fx market, New York the second largest, and Tokyo the third. In Asia, if trading in yen is disregarded, Singapore is the largest market and is growing rapidly.

Understand that as electronic brokering is becoming more available to smaller banks and international businesses, the spot currency trading activities of large banks are diminishing in Europe and North America.

Identify the growth areas for currency traders, which are derivatives, hedges, swaps, and Asian currencies.

Understand the central reserve asset/national currency conflict of the U.S. dollar and the reasons and uses for special drawing rights (SDRs).
The U.S. dollar is the currency of the United States, but it is also the major reserve asset of other countries. It is usually desirable for countries to increase their reserve assets, but that depends on growing amounts of US$s being in the hands of foreign holders, which may not be in the best interest of the United States. SDRs were established by the IMF to replace the U.S. dollar as the main central reserve asset.

Discuss the euro and its present state of acceptance by EU countries.
The euro became an official currency value in January 1999, but euro coins and bills were not scheduled to be in circulation until 2002. Eleven of the 15 EU countries accepted the euro, and they are referred to as the euro zone; as of the end of 2000, the other 4 EU countries are either striving to qualify for euro-zone membership, as in the case of Greece, or deciding whether to join, as in the case of Britain, Denmark, and Sweden.