The International


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The International

  • The International

  • Monetary System

  • and the Balance

  • of Payments


Discuss the role of the international monetary system in promoting international trade and investment

  • Discuss the role of the international monetary system in promoting international trade and investment

  • Explain the evolution and functioning of the gold standard

  • 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



Explain the evolution of the flexible exchange rate system

  • Explain the evolution of the flexible exchange rate system

  • Describe the function and structure of the balance of payments accounting system

  • Differentiate among the various definitions of a balance of payments surplus and deficit



The international monetary system

  • The international monetary system

  • establishes the rules by which

  • countries value and exchange their

  • currencies and provides a mechanism for

  • correcting imbalances between a

  • country’s international payments and

  • receipts.



The Balance of Payments (BOP)

  • The Balance of Payments (BOP)

  • Accounting System records

  • international transactions and

  • supplies vital information about the

  • health of a national economy and

  • likely changes in its fiscal and

  • monetary policies.



The Gold Standard

  • The Gold Standard

  • The Sterling-Gold Standard

  • The Collapse of the Gold Standard

  • The Bretton Woods Era

  • The End of the Bretton Woods Era



Countries agree to buy or sell their

  • 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.





British pound sterling was the most important currency from 1821 to 1918.

  • British pound sterling was the most important currency from 1821 to 1918.

  • Most firms would accept either gold or British pounds.





Economic pressures of WWI

  • 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 demand




44 countries met in Bretton Woods, New Hampshire, in 1944

  • 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 Fund



Goal 1: to help finance reconstruction of European economies

  • Goal 1: to help finance reconstruction of European economies

    • Accomplished in mid-1950s
  • Goal 2: to build economies of the world’s developing countries





To promote international monetary cooperation

  • 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 payments



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 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 members



Open to any country willing to agree to rules and regulations



Countries agreed to peg the value of currencies to gold

  • Countries agreed to peg the value of currencies to gold

  • U.S. $ keystone of system

  • Fixed exchange rate system

  • Adjustable peg

  • Functioned well in times of economic prosperity



Susceptible to speculative “runs on the bank”

  • Susceptible to speculative “runs on the bank”

  • U.S. $ became only source of liquidity necessary to expand international trade

  • People questioned the ability of U.S. to meet obligations (Triffin Paradox)

  • IMF created special drawing rights (SDRs) – paper gold

  • Bretton Woods system ended August 15, 1971



Most currencies began to float

  • Most currencies began to float

  • Value of U.S. $ fell relative to most major currencies

  • Group of Ten agreed to restore fixed exchange rate system with restructured rates of exchange



Development of floating exchange rate system

  • Development of floating exchange rate system

  • Legitimized in 1976 with the Jamaica Agreement







Believed flexible system would hinder ability to create integrated economy

  • Believed flexible system would hinder ability to create integrated economy

  • Created European Monetary System to manage currency relationships

  • ERM participants maintained fixed exchange rates among their currencies

  • Facilitated creation and adoption of euro







OPEC quadrupled world oil prices

  • OPEC quadrupled world oil prices

    • Resulted in inflationary pressures in oil-importing countries
    • Exchange rates adjusted
    • Transfer of wealth
  • Countries borrowed more than they could repay





The BOP accounting system is a

  • The BOP accounting system is a

  • double-entry bookkeeping system

  • designed to measure and record all

  • economic transactions between

  • residents of one country and residents of

  • all other countries during a particular

  • time period.





Measures and records all economic transactions between residents of one country and residents of all other countries during specified time period

  • Measures and records all economic transactions between residents of one country and residents of all other countries during specified time period

  • Provides understanding of performance of each country’s economy in international markets

  • Signals fundamental changes in country competitiveness

  • Assists policy makers in designing appropriate public policies



Records international transactions made in some time period

  • Records international transactions made in some time period

  • Records only economic transactions

  • Records transactions between residents of one country and all other countries

    • Residents include individuals, businesses, government agencies, nonprofit organizations
  • Uses a double-entry system





Exports and imports of goods

  • Exports and imports of goods

  • Exports and imports of services

  • Investment income

  • Gifts









Records level of official reserves

  • Records level of official reserves

  • Four types of assets





BOP must balance

  • BOP must balance

  • Current Account + Capital Account + Official Reserves Account = 0

  • Current Account + Capital Account + Official Reserves Account + Errors and Omissions = 0











Official Settlements Balance reflects changes in a country’s official reserves; essentially, it records the net impact of the Central Bank’s intervention in the foreign-exchange market in support of the local currency

  • Official Settlements Balance reflects changes in a country’s official reserves; essentially, it records the net impact of the Central Bank’s intervention in the foreign-exchange market in support of the local currency








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