Unit Five Money Systems

Unit 6 Vocabulary Account Receivable Bill of Exchange Bond Capital Project Commercial Invoice Credit Terms Currency Future Electronic Funds Transfer (EFT) Exchange Controls Exchange Rate Foreign Exchange Foreign Exchange Market Floating Exchange Rate Hard Currency Interest Rate International Money Fund (IMF) Insurance Certificate Letter of Credit Money Promissory Note Soft Currency Trade Credit World Bank

Unit 6 Essential Question How is money used and exchanged in international business?

Amplifying Questions  What is the role of money and currency systems in international business?  What factors affect the value of currency? Essential Question 1 Money Systems What is a money system and why is it used? International Business pg

Money and Currency Systems What is money? Acceptability Scarcity Durability Divisibility Portability VS.

Money and Currency Systems Why is money used? Medium of exchange Measure of value Store of value

Gold Standard Shift from “farm” standard to “gold” standard occurred around 1200 AD. Gold Standard: An agreed value of gold per ounce.

Gold Standard - History On December 22, 1717, Sir Issac Newton, master of the mint, established the price of gold at 3 pounds, 17 shillings, 10.5 pence per ounce. Due to the financial burdens of World War I many countries were forced to pay their debts in gold. Rather than diminishing their gold reserves, the countries dropped the gold standard.

Gold Standard - History Bretton Woods Conference Held in 1945 in Bretton Woods, New Hampshire. Established the International Monetary Fund (IMF). Established the gold exchange standard - one ounce of gold would be worth US$35.

Gold Standard - History From 1958 to 1971 the U.S. fiscal policy ran up a deficit balance of payment to the point where each US$ in circulation was backed by only $0.22 of gold. In August, 1971 Britain requested the U.S. pay its debt, US$8 Billion, in gold. To prevent U.S. bankruptcy, President Nixon ordered the U.S. off the gold exchange standard.

Foreign Exchange Balance of payments - Flow of money Economic conditions Money supply and demand Risk Inflation Political Stability

Amplifying Questions  How do you calculate exchange rates?  How is foreign currency manipulation controlled?  What are the functions of the World Bank and the International Monetary Fund? Essential Question 2 Money Systems How is currency exchanged? International Business pg

Foreign Exchange Activities Changing exchange rates Soft Currency Hard Currency Floating Exchange Rate Cash, Traveler’s Check, or Credit Card?

Foreign Exchange Activities Exchange Rate Calculations Step 1: Setup a ratio. Step 2: Solve for the missing variable. Examples: How many British Pounds will fifty-five US dollars buy when US$ buys GB£1.00? How many Japanese Yen will twenty British Pounds buy when GB£ and J¥ buys US$1.00?

Foreign Exchange Activities The foreign exchange market Foreign exchange controls

International Financial Agencies The World Bank International Bank for Reconstruction and Development (IBRD) Sub-organization of the UN Provides economic assistance to less developed nations through the: International Development Association (IDA) – Provides low interest long term (50 years) loans to developing countries. International Finance Corporation (IFC) – Provides capital and technical assistance to private businesses in nations with limited resources.

International Financial Agencies The International Monetary Fund (IMF) Sub-organization of the UN Promotes economic cooperation and maintains an orderly system of world trade and exchange rates by: Analyzing economic situations – monitors a country’s trade, borrowing and government spending. Suggesting economic policies to encourage global trade. Providing low interest loans to countries with high foreign debt to avoid escalating trade deficits and currency devaluation.

Amplifying Questions  What are the types of payments used for international business transactions?  How are letters of credit used in international transactions? Essential Question 3 Money Systems How is currency transactions handled between countries? International Business pg

International Financial Transactions Foreign trade payment methods Cash in advance – Pay before goods received Letter of credit – Document issued by a bank Sale on account - Credit Sources of international financing Short-term financing – Less than a year Long-term financing – Greater than a year

Other Payment Methods and Financial Documents Promissory note Bill of exchange Electronic funds transfer (EFT) Commercial invoice Insurance certificate