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

  • Open to any country willing to agree to rules and regulations

  • 185 member countries as of 2008

  • Membership requires payment of a quota



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

    • Gold
    • Convertible currencies
    • SDRs
    • Reserve positions at the IMF




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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