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International Monetary System

International Monetary System. 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

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International Monetary System

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  1. International Monetary System

  2. 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 Chapter Preview International Business 3e

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

  4. 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 Strong Currency: Curse or Cure? International Business 3e

  5. Stable exchange rates Improve accuracy of financial planning Predictable exchange rates Reduce surprises of unexpected rate changes Stability and Predictability International Business 3e

  6. Identical item must have an identical price in all countries when expressed in a common currency Big MacCurrencies Undervalued or overvalued Fairly good rate predictor Limited use in business decisions Law of One Price International Business 3e

  7. 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 Purchasing Power Parity International Business 3e

  8. Money supply Monetary policy directly affects interest rates and money supply Fiscal policy indirectly affects taxes and spending Employment High employment raises wages, which are embodied in consumer prices Interest rates High rates lower borrowing and spending, which lowers inflation Adjustment Exchange rates adjust to maintain PPP Inflation: Key Factors International Business 3e

  9. 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 Interest Rates International Business 3e

  10. Added costs Business confidence & psychology Trade barriers Evaluating PPP International Business 3e

  11. Efficient (inefficient) market views Prices reflect (don’t reflect) all public information Forecasting techniques Fundamental analysis Technical analysis Forecasting Exchange Rates International Business 3e

  12. International monetary system that linked nations’ currencies to specific values of gold In place from 1700s to 1939 Reduced exchange-rate risk Restricted monetary policies Corrected trade imbalances Ended by “competitive devaluation” Gold Standard International Business 3e

  13. International monetary system based on value of US dollar (1944 to 1973) Fixed exchange rates Built-in flexibility World Bank and IMF Ended by weak US dollar Bretton Woods Agreement International Business 3e

  14. 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 Jamaica Agreement International Business 3e

  15. Managed float system Pegged exchange rates Currency board European monetary system The System Today International Business 3e

  16. Developing nations’ debt crisis Mexico Southeast Asia Russia Argentina Recent Financial Crises International Business 3e

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