The document discusses the history and features of the gold standard, balance of payments, and flexible exchange rates. It provides details on how the gold standard works by using gold as a medium of exchange. It then explains the key components and accounting of a country's balance of payments, as well as the importance of maintaining equilibrium. Finally, it outlines the history and mechanics of flexible exchange rates, noting that rates are determined by supply and demand rather than central bank intervention.

1. The Gold Standard
The Balance of Payments
The F lexible E xchange R ate
Presented by:

2. The Gold Standard

3. Gold Standard
is a monetary system in which the
standard unit of currency is a fixed
quantity of gold or is kept at the value of
the fixed quantity of gold. The currency
or the paper money is freely convertible
into a fixed amount of gold per unit of
currency

4. How does it work?
G old or a currency that is convertible into gold at a fixed price is used as a
medium of international payments. A country that uses the gold standard sets
a fixed price of gold and buys and sells gold at that price. That fixed price is
used to determine the value of the currency.
N O TE : If exchange rates rise above or fall below the mixed rate by more than
the cost of shipping, large gold inflows or outflows occur until the rates
return to the official level.

5. Principles Governing
Gold Standard
a. There should be free movement of gold between countries;
b. There should be automatic expansion or contraction of currency and
credit with the inflow and outflow of gold; and
c. The governments in different countries should help facilitate the gold
movements by keeping their internal price system flexible in their
respective economies.

6. 1 871 to
1 91 4
1 821
1 871
1 900
A brief history
of the Gold
Standard
The use of gold as money began thousands of
years ago and has been widely accepted ever
since, together with various other commodities
but the early use of gold as money did not create
a gold standard.
The formal gold standard was first established
and the U nited K ingdom, particularly G reat
B ritain, was the first one to adopt it.
The international gold standard emerged
following its adoption by G ermany.
The gold standard was at its pinnacle.
The majority of the developed nations were
linked to the gold standard. Ironically, the
U nited S tates was one of the last countries to
join.
before the
1 8th century

7. 1 928
1 871
1 931
A brief history
of the Gold
Standard
W orld W ar I caused many countries to suspend or abandon
the gold. W ith the outbreak of war, normal commercial
transactions between the Allies (F rance, R ussia, and the
U nited K ingdom) and the C entral P owers (Austria-
H ungary, G ermany, and the O ttoman E mpire) ceased.
The gold standard had been virtually re-established,
although because of a relative scarcity of gold, most nations
adopted a gold-exchange standard, in which they
supplemented their central-bank gold reserves with
currencies that were convertible into gold at a stable rate of
exchange.
N ot a single country remained on the full gold standard
The gold exchange standard collapsed again during the
G reat D epression
B ritain suspended the gold standard leaving only the
U nited S tates and F rance with large gold reserves
1 91 4
1 937

8. Advantages
of G old
S tandard
It limits the power of governments or
banks to cause price inflation by the
excessive issue of paper currency
It creates certainty in international
trade by providing a fixed pattern of
exchange rates.

9. It may not provide sufficient flexibility in
the supply of money
A country may not be able to isolate its
economy from depression or inflation in the
rest of the world
Disadvantages of Gold
Standard
The process of adjustment for a country with
a payments deficit can be long and painful
whenever an increase in unemployment or a
decline in the rate of economic expansion
occurs.

10. The Balance of
Payments

11. A country has
to deal with
other countries
with respect to
the following:
(1) visible items which include all types of
physical goods exported and imported;
(2) invisible items which include all those
services whose export and import are not
visible (e.g., transport services, medical
services, etc.); and
(3) capital transfers which are concerned
with capital receipts and capital
payments.

12. Balance of
Payments
Also known as balance of international payments,
is the method countries use to monitor all
international monetary transactions at a specific
period. It is a statement of all transactions made
between entities in one country and the rest of the
world. Usually, the BOP is calculated every quarter
and every calendar year.
Transactions made consist of:
(1) import and export of goods, services, and capital; and
(2) transfer payments, such as foreign aid and remittances.

13. A brief history of Balance of Payments
BEFORE THE
19TH
CENTURY
l international
transactions were
denominated in gold,
providing little
flexibility for
countries
experiencing trade
deficits.
1930S
The Great
Depression led
countries to
abandon the gold
standard and
engage in
competitive
devaluation of their
currencies.
MID 1940S-
1970S
The Bretton Woods
System prevailed
from the end of
World War II
introduced a gold-
convertible dollar
with fixed exchange
rates to other
currencies.

14. A brief history of Balance of Payments
1998
At the end of the dollar's convertibility to
gold (Nixon shock), currencies have
floated freely by hoarding foreign
reserves. Due to the increased mobility of
capital across borders, balance-of-
payments crises sometimes occur,
causing sharp currency devaluations
such as the ones that struck in Southeast
Asian countries.
LATE 2000S
During the Great Recession, several
countries embarked on competitive
devaluation of their currencies to try
to boost their exports. All of the
world’s major central banks
responded to the financial crisis at
the time by executing dramatically
expansionary monetary policy.

15. BALANCE OF PAYMENTS
takes into account all the
transactions with the rest of the
world.
BALANCE OF TRADE
takes into account all the trade
transactions with the rest of the
world.

16. • It is a systematic record
of all economic
transactions between one
country and the rest of
the world.
Features of Balance of Payments
3. It relates to a period.
Generally, it is an
annual statement.
4. It adopts a double-
entry bookkeeping
system.
2. It includes all
transactions, visible as
well as invisible.

17. IMPORTANCE OF
BALANCE OF
PAYMENTS
1. Balance of payments
records all transactions
that create demand
and supply of a
currency.
2. Judge the economic
and financial status of a
country in the short
term.
3. Balance of payments
may confirm a trend in the
economy’s international
trade and exchange rate
of the currency. This may
also indicate a change or
reversal in the trend.
4. This may indicate a
policy shift of the
monetary authority
(RBI) of the country.
5. Balance of payments may
confirm the trend in the
economy’s international
trade and exchange rate of
the currency. This may also
indicate a change or
reversal in the trend.

18. a. If If a transaction earns
foreign currency for the nation, it
is a credit and is recorded as a
plus item.
b. If a transaction involves spending of foreign currency it is a debit and is recorded as a
negative item.
General Rule in
BOP
Accounting

19. Components of
Balance of
Payments
ERRORS AND OMISSIONS.
Relate statistical discrepancies and transactions that are
not recorded.
THE FINANCIAL ACCOUNT
In the financial account, international monetary flows
related to investment and the reserves are documented.
THE CAPITAL ACCOUNT
The capital account is where all international capital
transfers are recorded
THE CURRENT ACCOUNT
The current account includes transactions in goods,
services, investment income, and current transfers.

20. Disequilibrium in the Balance of
Payments
DISEQUILIBRIUM IN THE BALANCE OF PAYMENTS
MEANS A CONDITION OF SURPLUS OR DEFICIT.

21. Item 1 Item 2 Item 3 Item 4 Item 5
50
40
30
20
10
0
Disequilibrium in the
Balance of Payments
SURPLUS
Occurs when total receipts exceed total payments.
Thus BOP=Credit>Debit.
DEFICIT
Occurs when total payments exceed total receipts.
Thus, BOP= Credit<Debit.

22. TO CORRECT
DISEQUILIBRIUM
IN THE BALANCE
OF PAYMENTS
Measures
(1) Monetary Measures; and
(2) Non-Monetary Measures

23. f. Exchange Control
d. Devaluation. By lowering the exchange value of the official currency;
a) Monetary Policy. Expanding or contracting money supply in the economy;
MONETARY MEASURES
e. Deflation. By reducing the quantity of money to reduce prices; or
c. Exchange Rate Depreciation. By reducing the value of the domestic
currency concerning foreign currency;
b. Fiscal Policy. Government’s policy on income and expenditure;

24. c. Import Control. Adoption of tariffs and quotas.
b. Import Substitutes. Encourage the production of
import substitutes; or
a. Export Promotion. Controlling the export promotion;
NON-MONETARY MEASURES

25. The Flexible
Exchange
Rates

26. Floating/ Flexible Exchange
Rate
A floating/ flexible exchange rate regime is where the
rate of exchange is determined purely by the demand and
supply of that currency on the foreign exchange market,
which is not pegged nor controlled by central banks. With
no intervention from the central bank, the current account
surplus will equal the capital account deficit so that the
official settlements balance equals zero. In addition,
since the central bank does not intervene to fix the
exchange rate, the money supply can change to any level
desired by the monetary authorities.

27. Floating/ Flexible Exchange
Rate
NOTE: The government can intervene when the
currency is too low or too high to keep the
currency at a favorable price or it is necessary
to ensure stability and to avoid inflation.
However, it is less often that the central bank of
a floating regime will interfere.

28. Floating/ Flexible Exchange
Rate VS Fixed Exchange Rates
Fixed or pegged rate is
determined by the
government through its
central bank. The rate is
set against another major
world currency.
Fixed Exchange Rate
The floating rate is
determined by the open
market through supply and
demand.
Floating/ Flexible
Exchange Rate

29. A brief history
of the
Floating/
Flexible
Exchange Rate
The Bretton Woods Conference took place with
a total of 44 countries met with attendees
limited to the Allies in World War II. The
conference established the International
Monetary Fund (IMF) and the World Bank, and
it set out guidelines for a fixed exchange
rate system.
The U.S. dollar became the reserve currency
through which central banks carried out
interventions to adjust or stabilize rates.
The first large crack in the system appeared,
with a run on gold and attack on the British
pound that led to devaluatio
July 1944
1967

30. A brief history
of the
Floating/
Flexible
Exchange Rate
President Richard Nixon took the United
States off the gold standard
The system had collapsed, and participating
currencies were allowed to float freely.
1971
late 1973

31. In the graph below, an increased currency supply from S1 to S2 at the
same demand D1 implies that the currency-pair price will depreciate.
In contrast, increased demand from D1 to D2 at the same supply S1
will lead to currency appreciation.
Functions of a
Floating
Exchange Rate

32. Benefits of
a Floating/
Flexible
Exchange
Rate
- In theory, any imbalance in that
statement automatically changes the
exchange rate. With the currency
depreciate, the country’s exports would
become cheaper, resulting in an
increase in demand and eventually
attaining equilibrium in the balance of
payments.
- Floating exchange rate currencies
can be traded without any restrictions,
unlike currencies with fixed exchange
rates.
1. Stability in the balance of
payments (BOP)
2. Foreign exchange is
unrestricted.

33. Benefits of a Floating/ Flexible
Exchange Rate
- A country’s macroeconomic fundamentals affect the floating exchange
rate in global markets, influencing the flow of portfolios between
countries.
- For a floating exchange rate, central banks are not required to keep
large foreign currency reserve amounts for defending the exchange rate.
3. Market efficiency enhances
4. Large foreign exchange reserves not required
5. Import inflation protected
Countries with fixed exchange rates face the problem of importing
inflation through surpluses of the balance of payments or higher prices
of imports. However, countries with floating exchange rates do not face
such a problem.

34. Limitations of a
Floating/ Flexible
Exchange Rate
- The lack of
control over
floating exchange
rates can limit
economic growth or
recovery.
- Floating exchange
rates are prone to
fluctuations and are
highly volatile by
nature.
- If a country is
suffering from
economic issues,
such as unemployment
or high inflation,
floating exchange
rates may intensify
the existing
2. Restricted
economic growth
or recovery
1. Exposed to the
volatility of the
exchange rate
3. Existing
issues may worsen

36. References:
1
2
3
4
5
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ofinternationalmonetarysystem
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standard.asp
https://www.slideshare.net/123456789ASHU/gold-
standard-61143396
https://www.britannica.com/topic/gold-standard
https://www.A.com/monetarysstem/

37. References:
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7
8
9
10
https://www.slideshare.net/sureshthengumpallil/balance-of-
payment-56855705
https://www.investopedia.com/terms/b/bop.asp
https://www.investopedia.com/insights/what-is-the-balance-
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