1. Chapter 10 International
Monetary System

2. International Business 4e
Chapter Preview
List the benefits of stable and predictable exchange rates
Discuss the law-of-one-price principle
Describe purchasing power parity and the factors that affect exchange rates
Explain how the gold standard functioned
Discuss the experience with Bretton Woods
Describe today’s international monetary system
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International Business 4e

3. Currency Values and Business
Exchange rates affect activities of both domestic and international firms
Devaluation
Revaluation
export prices
lowers
raises
import prices
lowers
raises
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International Business 4e

4. Major World Currencies
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International Business 4e

5. Strong Currency: Curse or Cure?
Export strategies in the face of a strong currency
Get lean by shaving production costs
Reward customers for paying a higher price
Diversify into more currency-proof sectors
Follow global demand to maintain sales
Freezing prices can generate new sales
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International Business 4e

6. Stability and Predictability
Stable
exchange rates
Predictable
exchange rates
Improve accuracy
of financial planning
Reduce surprises
of unexpected
rate changes
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International Business 4e

7. International Business 4e
Value of U.S. Dollar
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International Business 4e

8. Law of One Price Identical item must have
an identical price in all countries
when expressed in a common currency
Big MacCurrencies
Undervalued
or overvalued
Limited use in
business decisions
Fairly good
rate predictor
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International Business 4e

9. International Business 4e
Big Mac Index
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International Business 4e

10. Purchasing Power Parity
Relative ability of two nations’ currencies
to buy the same “basket” of goods in
those two nations
Considers price
levels in adjusting
relative currency values
Purchasing power
of a currency is
eroded by inflation
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International Business 4e

11. Inflation: Key Factors
Monetary policy directly affects interest
rates and money supply
Fiscal policy indirectly affects taxes
and spending
High employment raises wages, which
are embodied in consumer prices
High rates lower borrowing and spending,
which lowers inflation
Exchange rates adjust to maintain PPP
Money supply
Employment
Interest rates
Adjustment
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International Business 4e

12. International Business 4e
Interest Rates
Fisher Effect
Nominal Interest Rate =
Real Interest Rate + Inflation Rate
International
Fisher Effect
Difference in nominal interest rates
supported by two nations’ currencies
will cause an equal but opposite
change in their spot exchange rates
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International Business 4e

13. International Business 4e
Evaluating PPP
Added
costs
Trade
barriers
Business
confidence,
psychology
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International Business 4e

14. Forecasting Exchange Rates
Efficient (inefficient) market views
Prices reflect (don’t reflect) all public information
Forecasting
techniques
Fundamental analysis
Technical analysis
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International Business 4e

15. Gold Standard International monetary system that linked
nations’ currencies to specific values of gold
Restricted monetary policies
Reduced exchange-rate risk
Corrected trade imbalances
Ended by “competitive devaluation”
In place from 1700s to 1939
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International Business 4e

16. Bretton Woods Agreement
International monetary system based on
value of U.S. dollar (1944 to 1973)
Built-in flexibility
Fixed exchange rates
World Bank and IMF
Ended by weak U.S. dollar
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International Business 4e

17. Jamaica Agreement Formalized the system of floating exchange rates
as the new international monetary system (1976)
Managed
float system
Currencies float with
government intervention
Free
float system
Currencies float without
government intervention
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International Business 4e

18. European monetary system
The System Today
Managed float system
Pegged exchange rates
Currency board
European monetary system
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International Business 4e

19. Recent Financial Crises
Developing nations’ debt crisis
Mexico
Southeast Asia
Russia
Argentina
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International Business 4e

20. International Business 4e
Chapter Review
List the benefits of stable and predictable exchange rates
Discuss the law-of-one-price principle
Describe purchasing power parity and the factors that affect exchange rates
Explain how the gold standard functioned
Discuss the experience with Bretton Woods
Describe today’s international monetary system
© Prentice Hall, 2008
International Business 4e