Chap. 3. international monetary system


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Chap. 3. international monetary system

  1. 1. MKTG 26 : International Marketing Chapter 3 : International Monetary System PASIG CATHOLIC COLLEGE
  2. 2. Objective of the chapter 3 Describe the development of today’s international monetary system Explain how foreign exchange transaction are conducted Identify the problems associated with exchange rate fluctuations Discuss the balance of payments perspective of the United States Explain the creation of Eurodollars and its monetary effect.
  3. 3. The Development of Today’s International Monetary System  A number of countries were wrestling political freedom from colonial rulers.  It did take long for these countries to realize that political freedom alone was not sufficient.  Economic prosperity was not only necessary for existence but mandatory for long-term survival and growth.  Countries realized that planned international cooperation fostered economic development and prosperity.
  4. 4. The Bretton Woods Conference After world war II nations agreed to a framework on international rules – a code of behavior – to maintain monetary discipline and to ensure that dissenting nations did not frustrate economic development efforts through counteractions.
  5. 5. The Bretton Woods Conference Negotiation at Bretton Woods made certain recommendation in 1944. Each nation should be at liberty to use macroeconomic policies for full employment Free-floating exchange rates could not work. Their ineffectiveness had been demonstrated during 1920s and 1930s. The extremes of both permanently fixed and free-floating rates should be avoided. A monetary system was needed that would recognize that exchange rates were both a national and an international concern.
  6. 6. The International Monetary Fund The International Monetary Fund (IMF) was established at Bretton woods, New Hampshire to oversee the newly agreed upon monetary system with original members of 55 and now are over 150 members.
  7. 7. The International Monetary Fund There are several major accomplishment to the credit of the international Monetary System. Sustained a rapidly increasing volume of trade and investment. Displayed flexibility in adapting to changes in international commerce. Proved to be efficient( even when there decreasing % of reserve to trade) Proved to be hardly( its survived a number of pre- 1971 crises, speculative and otherwise, and the down-and-up swings of several business cycles) Allowed a growing degree of international cooperation. Established a capacity to accommodate reforms and improvements.
  8. 8. The IMF and Debt Crisis The debt crisis has a profound impact on the economic performance of developing countries. One of the most urgent tasks facing the international community is to find ways of reducing the drag exerted by the continuing debt overhang on economic growth in the developing world.
  9. 9. The IMF and Debt Crisis A framework to reduce the burden of debt must have two elements. First, the debtors need to grow faster and export move. Second, the cost of debt services must fall. Note: With the right policies in both industrial and developing countries, these elements can go hand in hand.
  10. 10. Fixed Versus Floating Rates Exchange rate stability of any lasting duration cannot be imposed externally by adoption of the pegged exchange rates and heavy official intervention in the foreign exchange market. When the floating exchange rates were introduced, it was said that balance-of-payments adjustments would be facilitated, but not only have imbalances not disappeared, they have become worse. It was thought that speculation would be curtailed. On the contrary, never has it assumed such proportions nor had such destabilizing effects.
  11. 11. Fixed Versus Floating Rates It was believed that market forces, left at last to their own devices, would determine the correct exchange rate balance. But never have imbalance been so great, nor fluctuation so wide and erratic and so little justified by economic fundamentals. It was hoped that autonomy in economic and monetary policy would be preserved, allowing each country free choice of its monetary policy and rate of inflation. Facts have completely belied this illusion.
  12. 12. Foreign Exchange Foreign exchange is the monetary mechanism by which transaction involving two or more currencies take place. Foreign exchange refers to the exchange of one country’s money for another country’s money.
  13. 13. Balance of Payments The balance of payments of a country summarizes all the transactions that have taken place between its residents and foreigners in a given period, usually a year. The world transactions refers to export and imports of goods and services, lending and borrowing of funds, remittances, and government aid and military expenditures. The terms residents includes all individuals and business enterprises, including financial institution, that are permanently residing within the country’s borders, as well as government agencies at all levels. ( can be included to Part I )
  14. 14. Balance of Payments In other words, balance of payments reflects the totality of a country’s economic relations with the rest of the world: its trade in goods, its exchange of services, its purchase and sale of financial assets, and such important government transactions as foreign aid, military expenditures abroad, and the payment of reparation.