1. International Business, 8th Edition
Griffin & Pustay
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Learning Objectives
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
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
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3. History of the International Monetary System: The Gold Standard
Under the gold standard, countries agree to buy or sell their paper currencies in exchange for gold
In 1821 the United Kingdom became the first country to adopt the gold standard
The gold standard effectively created a fixed exchange rate system
Sterling-based Gold Standard: Most firms accepted either gold or British pounds in settlement of transactions
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History of the International Monetary System: Collapse of the Gold Standard
World War I
The Great Depression
Competitive Devaluations
Beggar-Thy-Neighbor Policies
World War II
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5. History of the International Monetary System: Bretton Woods Era
Bretton Woods conferees agreed to:
Renew the gold standard on a greatly modified basis
The creation of two new international organizations
International Bank for Reconstruction and Development-World Bank
International Monetary Fund
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6. International Bank for Reconstruction and Development
Official name of the World Bank
Help finance reconstruction of the war-torn European economies
Build the economies of the world’s developing countries
Three affiliated organizations:
International Development Association
International Finance Corporation
Multilateral Investment Guarantee Agency
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7. International Bank for Reconstruction and Development
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8. International Monetary Fund
Boost international monetary cooperation
Facilitate international trade
Stabilize exchange arrangements
Foster multilateral payment system
Build confidence of members
Adjust international balance of payments
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9. International Monetary Fund: Quotas and Voting Power
As of 2013, countries were members
To join, a country must pay a quota
A country’s quota determines
Country’s voting power within the IMF
Country’s borrowing power from the IMF
IMF conditionality
IMF Members with Largest Voting Shares (As of 2013)
Member
Voting Shares
USA
16.8
Japan
6.2
Germany
5.8
France
4.3 UK
China
3.8
Italy
3.2
Saudi Arabia
2.8
Canada
2.6
Russia
2.4
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10. Dollar-Based Gold Standard
U.S. Dollar–Based Gold Standard
Fixed Exchange Rate
Adjustable Peg System
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History of the International Monetary System: The End of the Bretton Woods System
Speculative “Runs on the Bank”
Triffin Paradox
Special Drawing Rights (SDRs)
Nixon’s 1971 Speech
Smithsonian Conference
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History of the International Monetary System: Performance of the IMF Since 1971
Flexible (or Floating) Exchange Rate System
Managed Float (or, a Dirty Float)
Jamaica Agreement
Flexible exchange rate system legitimized
Pegged exchange rate
Crawling pegs
European Monetary System (EMS)
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13. Other Post–World War II Conferences
The Plaza Accord
The Louvre Accord
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14. International Debt Crisis
Soaring Oil Prices (1973 – 1974) and (1978 – 1979)
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Financial Crisis
International Debt Crisis
The Baker Plan
The Brady Plan
Asian Currency Crisis
Subprime Meltdown
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BOP Accounting System
Double-entry Bookkeeping System
Measures and records transactions between residents of one country and residents of all other countries
Importance of BOP statistics:
Help identify emerging markets for goods and services
Can warn of possible new policies that may alter a country’s business climate
Can indicate reductions in a country’s foreign- exchange reserves
Can signal increased riskiness of lending to particular countries
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17. BOP Accounting System: Major Components of the BOP System
Current Account
Capital Account
Official Reserves
Errors and Omissions
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Current Account
Exports and imports of goods (or merchandise)
Exports and imports of services
Investment income
Gifts (or unilateral transfers)
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Capital Account
Foreign Direct Investment (FDI)
Foreign Portfolio Investment (FPI)
Short-Term Foreign Portfolio Investments
Long-Term Foreign Portfolio Investments
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Capital Account
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21. Official Reserves Account
Records the level of official reserves held by a national government
Official reserves comprise 4 types of assets:
Gold
Convertible currencies
Special Drawing Rights (SDRs)
Reserve positions at the IMF
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Errors and Omissions
BOP accounting system must balance
Current Account + Capital Account + Official Reserves Account + Errors and Omissions = 0
Circumstances accounting for errors and omissions:
Underreporting of capital account transactions
Deliberate actions by individuals
Errors in the current account
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23. BOP Accounting System: U.S. BOP in 2012
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24. BOP Accounting System: Defining BOP Surpluses and Deficits
Trade Surplus
Trade Deficit
Official Settlements Balance
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