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Chapter 10 International Monetary System

Chapter 10 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

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Chapter 10 International Monetary System

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  1. Chapter 10 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 4e

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

  4. Major World Currencies International Business 4e

  5. 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? Export strategies in the face of a strong currency International Business 4e

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

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

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

  9. Big Mac Index 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 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 International Business 4e

  12. 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 International Business 4e

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

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

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

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

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

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

  20. 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 Review International Business 4e

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