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International Business : The Challenge of Global Competition, 8/e
Donald Ball
Wendell H. McCulloch, California State University Long Beach
Paul L. Frantz, California State University Long Beach
Michael Geringer, California Polytechnic State University
Michael S. Minor, University of Texas Pan American
Understanding the International Monetary System

E Learning Session

  1. A Brief Gold Standard History and Comment PowerPoint (31.0K)
    1. Since about 1200 AD, the price of gold has trended up
    2. In 1980s, gold's price has trended down
    3. Gold is still an important element of international economy
    4. Return to the Gold Standard
      • Although no country is on the gold standard (gold backs value of currency) the idea has strong supporters
      • Government cannot create money for which it does not have gold to back it up
      • This prevents countries from over expanding monetary supplies
    5. Present day uses of gold
      • In addition to jewelry, gold is also used in industry
      • Many cultures measure personal wealth by gold possession
      • World's interest in gold remains high
  2. Bretton Woods and the Gold Exchange PowerPoint (36.0K)
    1. 1944 meeting between US and Great Britain to plan post war economy
    2. Countries agreed
      • Stable exchange rates were desirable
      • Floating or fluctuating rates had proved unsatisfactory
      • Government controls on trade had been wasteful
    3. Established the International Monetary fund (IMF) to oversee exchange policy PowerPoint (37.0K)
    4. Role of US currency as a Central Reserve Asset was not predicted
    5. US dollar was the only one agreed to be exchangeable for gold
    6. Balance of Payments
      • IMF assists countries having problems with Balance of Payment
      • BOP is an important indicator of what may happen to a country's economy
      • Market measures are steps taken to end a BOP deficit, such as deflating the economy or devaluing the currency
      • Nonmarket measures are steps taken to end BOP such as setting tariffs, quotas, or currency exchange controls
      • Debts and credits in international transactions
        1. International debit transactions involve payments by domestic residents to foreign residents
        2. The opposite are credit transactions
      • Double-Entry accounting
        1. The BOP is a double-entry accounting
        2. The BOP is divided into several accounts Concept Check Concept Check: The BOP is divided into all of the following accounts except: (a) Capital account (b) Current account (c) Official reserves account (d) Exchange account (e) All of the above are included )
          1. Current account
            • Goods or merchandise
            • Services
            • Unilateral transfers
          2. Capital account
            • Records the net changes in financial assets and liabilities
            • Direct investment
            • Portfolio investment
            • Short-term capital
          3. Official reserves account
            • Gold export or import
            • Increase or decrease in foreign exchange
            • Increase or decrease in liabilities for foreign central banks
    7. Balance of Payments Equilibrium or Disequilibrium
      • Temporary and Fundamental BOP Deficits
        1. A temporary BOP deficit is one that can be affect by monetary or fiscal policy
          1. Monetary policies regulate the amount of growth or contraction of a nation's monetary stock
          2. Fiscal policies regulate the money a government receives through taxes and its expenditure
        2. Permanent BOP deficit is too severe to be repaired by monetary or fiscal policy
          1. IMF allows currencies to be devalued
          2. IMF has permitted stable use of this technique
    8. American BOP Deficit
      • Around 1958 US began to run a BOP deficit
      • It increased economic development around the world
      • Trading partners were not of mind to urge the US to use Monetary or Fiscal restraints to halt the outward flow
      • Reasons for US inaction
        1. Countries are not anxious to have their reserves devalued
        2. The BOP deficit gave foreign products a price advantage
        3. US expenditures overseas for military presence aided local economies
  3. Gold Exchange Standard
    1. Gold for dollars
      • A "central bank" is a government institution that manages the monetary policy of a country
      • The Bretton woods agreement required the US to delivered one ounce of gold for each $35 of US currency
    2. Gold and dollars go abroad
      • Between 1958 and 1971 US deficit grew to $56 billion
      • Foreign banks used dollars as a central reserve asset
      • By mid-1960 foreign banks held more currency that the US had in gold in reserve Concept Check Concept Check: The US made the shocking decision to close the "gold window" because (a) Foreign banks were beginning to depend heavily on US gold (b) Foreign banks held more currency than the US had in gold reserves (c) Foreign banks were not holding enough currency (d) The United States wanted to make other countries offer their own currencies (e) None of the above.
  4. August 15, 1971, and the Next Two Years
    • US closed the "gold window" announcing that exchange for gold was no longer an option
    • Decision sent shock wave through world monetary community
    • Politicians versus speculators
      1. New durable agreements for fixed currency rates were tried, Dec. 1971 and Feb 1973
  5. 1973 to the Present
    1.  
      • March 1973 saw beginning of the floating currency exchange rate system
        1. Free(clean) float is closest to perfect competition system
          1. Rate set without government intervention PowerPoint (30.0K)
        2. Managed (dirty) float has government intervening for PowerPoint (32.0K)
          1. Smoothing market irregularities
          2. Assuring orderly markets
      • Since 1985 government intervention in float is more direct
    2. Currency Areas PowerPoint (34.0K)
      • Most major currencies now float
      • Pegged to a single currency or a "basket" of several currencies
    3. Snake
      • Currency group created in Europe
      • A group of currencies was used to allow float between anchor values
      • Concept was weakened when major currencies were pulled from the calculation
      • This was the fore runner of the European Monetary System
    4. Experience with floating
      • In general the floating system has worked
      • Currencies continue to change value relative to each other and is a major influence of much international trade Concept Check Concept Check: "Economic floating" occurs when (a) Currencies change value relative to each other (b) A dollar bill with a density less than 1 g/m3 is placed in water which has a density of 1 g/m3 (c) Currencies hold steady in their value relative to each other (d) Currencies of one value or sold to other countries to hedge inflation (e) None of the above)
      • Effect of the 1997 Asian Financial Crisis on Dollar values
        1. Major efforts to convert local currency to dollars
        2. Resulted in major devaluations of Asian currencies
        3. Likely occurred because of the close interrelationship among East Asian economies
      • Forecasting Float Direction
        1. Political events, government economic policy decisions are predictors of float direction
        2. Purchasing Power Parity sales help to expose inflation in rate float
    5. Money Markets, Foreign Exchange
      • Money markets are places where currency can be bought and sold, or borrowed
      • Traditional money markets are declining in activity as
        1. Governments are more realistic about exchange rate targets
        2. Electronic trading of currency
      • Asian currencies to the rescue
        1. Asian currencies are seen as increasingly stable and a good exchange prospect
        2. London, New York, Tokyo have largest currency trading markets
        3. Foreign exchange trading has surpassed world trade in volume
    6. SDRs in the future
      • Special Drawing rights may be a step toward international currency
      • These a bookkeeping entries at the IMF
      • Seeking to make SDRs principal reserve assets in international monetary system
      • Value of SDR
        1. Based on a "basket" of currencies
        2. Each currency is "weighted" in its value to the calculation
    7. Uses of the SDR
      • Holders of SDRs
        1. Held by Regional Development Banks
        2. Holders receive interest on amount held calculated weekly
    8. SDRs as a central reserve asset
      • Major vision was to replace any currency as a central reserve asset with SDRs
      • At a 1996 seminar, it was suggested that the SDR was not likely to fill the desired role
      • Reason may be as simple as country currencies being more flexible in their use as central reserve assets
    9. European Monetary System Concept Check Concept Check: The European Monetary System is (a) More flexible than the SNAKE because it can control exchange rates (b) Less flexible than the SNAKE because it cannot control exchange rates (c) A grouping of western European nations cooperating to maintain currencies at fixed exchange rates (d) Both b and c (e) Both a and c )
      • A grouping of Western European nations cooperating to maintain their currencies at fixed exchange rates
      • EMS members agreed to maintain currencies at values within a specified range
      • To aid the EMS to be more successful, the European Monetary Cooperation fund (EMCF) was created
      • A difference between the EMS and the snake is the flexibility of the EMS to control exchange rates
      • If a member country's currency weakens but the government fails to act to support, the EMS has the authority to alter exchange rates of all member nations to ensure stability
    10. From the European Currency Unit (ECU) to the Euro
      • The ECU was created as the EMS bookkeeping unit
      • Became popular as an investment vehicle because it did not include either the US $ of the Japanese yen
      • ECU was actively promoted by governments
      • The Euro replaced the ECU although it will also be a retail currency
      • Transition to the Euro
        1. The Maastricht Treaty began the transition to the Euro
        2. Euro and national currencies will coexist until 2002
        3. Some critics are suggesting that implementation problems are so great that full adoption of the Euro should be delayed
        4. By late 2000 only 11 of 15 EU countries had adopted the Euro and subjected their monetary policies to the European Central Bank
  6. Euro effect on the US Dollar
    1. Some observers predict the Euro will be as influential in monetary markets as the US dollar has been




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