Transcript Griffin_07

the international
monetary system
and the balance
of payments
international business, 5th edition
chapter 7
Chapter Objectives 1
• Discuss the role of the international
monetary system in promoting
international trade and investment
• Explain the evolution and functioning of
the gold standard
• Summarize the role of the World Bank
Group and the International Monetary
Fund in the post-World War II international
monetary system established at Bretton
Woods
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Chapter Objectives 2
• Explain the evolution of the flexible
exchange rate system
• Describe the function and structure of the
balance of payments accounting system
• Differentiate among the various
definitions of a balance of payments
surplus and deficit
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International Monetary System
The international monetary system
establishes the rules by which
countries value and exchange their
currencies and provides a
mechanism for correcting
imbalances between a country’s
international payments and receipts.
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Balance of Payments
The balance of payments (BOP)
accounting system records
international transactions and
supplies vital information about the
health of a national economy and
likely changes in its fiscal and
monetary policies.
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History of the International
Monetary System
• The Gold Standard
• The Sterling-Gold Standard
• The Collapse of the Gold Standard
• The Bretton Woods Era
• The End of the Bretton Woods Era
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The Gold Standard
Countries agree to buy or sell their
paper currencies in exchange for
gold on the request of any individual
or firm and to allow the free export of
gold bullion and coins.
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Fixed Exchange Rate System
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Sterling-Based Gold Standard
• British pound sterling was the most
important currency from 1821 to
1918.
• Most firms would accept either gold
or British pounds.
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Map 7.1 The British Empire, 1913
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The Collapse of the Gold
Standard
• Economic pressures of WWI
• Countries suspended pledges to buy or
sell gold at currencies’ par values
• Gold standard readopted in 1920s
• Dropped during Great Depression
• British pound allowed to float in 1931
– Float: value determined by supply and
demand
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Figure 7.1 The Contraction of
World Trade, 1929-1933
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The Bretton Woods Era
• 44 countries met in Bretton Woods, New
Hampshire, in 1944
• Goal: to create a postwar economic
environment to promote worldwide peace and
prosperity
• Renewed gold standard on modified basis
(dollar-based)
• Created International Bank for Reconstruction
and Development and International Monetary
Fund
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International Bank for Reconstruction and
Development (the World Bank)
• Goal 1: to help finance reconstruction of
European economies
– Accomplished in mid-1950s
• Goal 2: to build economies of the world’s
developing countries
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Figure 7.2 Organization of the
World Bank Group
International Bank for
Reconstruction and Development
International
Development
Association
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International
Finance
Corporation
Multilateral
Investment
Guarantee
Agency
Objectives of the
International Monetary Fund 1
• To promote international monetary cooperation
• To facilitate the expansion and balanced growth
of international trade
• To promote exchange stability, to maintain
orderly exchange arrangements among
members, and to avoid competitive exchange
depreciation
• To assist in the establishment of a multilateral
system of payments
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Objectives of the
International Monetary Fund 2
• To give confidence to members by
making the general resources of the IMF
temporarily available to them and to
correct maladjustments in their balances
of payments
• To shorten the duration and lessen the
degree of disequilibrium in the
international balances of payments of
members
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Membership in the IMF
• Open to any country willing to agree to
rules and regulations
• 184 member countries as of April 2006
• Membership requires payment of a quota
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The IMF plays a key role in stabilizing the
world’s monetary system.
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The Bretton Woods System
• Countries agreed to peg the value of
currencies to gold
• U.S. $ keystone of system
• Fixed exchange rate system
• Adjustable peg
• Functioned well in times of economic
prosperity
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The End of the Bretton Woods System
• Susceptible to speculative “runs on the bank”
• U.S. $ became only source of liquidity
necessary to expand international trade
• People questioned the ability of U.S. to meet
obligations (Triffin Paradox)
• IMF created special drawing rights (SDRs) –
paper gold
• Bretton Woods system ended August 15, 1971
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Post-Bretton Woods System
• Most currencies began to float
• Value of U.S. $ fell relative to most major
currencies
• Group of Ten agreed to restore fixed
exchange rate system with restructured
rates of exchange
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Table 7.1 The Groups of
Five, Seven, and Ten
Group of 5
Group of 7
Group of 10
United States
United States
United States
Japan
Japan
Japan
Germany
Germany
Germany
United Kingdom
United Kingdom
United Kingdom
France
France
France
Italy
Italy
Canada
Canada
Netherlands
Switzerland
Belgium
Sweden
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International Monetary System
since 1971
• Development of floating exchange rate
system
– Supply and demand for a currency determine
its price in the world market
– Managed float – central banks can affect
supply and demand
• Legitimized in 1976 with the Jamaica
Agreement
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Table 7.2 Key Central Banks
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Country
Bank
Canada
Bank of Canada
European Union
European Central Bank
Japan
Bank of Japan
United Kingdom
Bank of England
United States
Federal Reserve Bank
European Union
• Believed flexible system would hinder
ability to create integrated economy
• Created European Monetary System to
manage currency relationships
• ERM participants maintained fixed
exchange rates among their currencies
• Facilitated creation and adoption of euro
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International Debt Crisis
• OPEC quadrupled world oil prices
– Resulted in inflationary pressures in oil-importing
countries
– Exchange rates adjusted
– Transfer of wealth
• Countries borrowed more than they could repay
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Approaches to Resolve the
International Debt Crisis
The Baker Plan
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The Brady Plan
Figure 7.4
The Asian Contagion
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The Balance of Payments
Accounting System
The BOP accounting system is a
double-entry bookkeeping system
designed to measure and record all
economic transactions between
residents of one country and
residents of all other countries
during a particular time period.
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Balance of Payments (BOP)
Accounting System
• Measures and records all economic transactions
between residents of one country and residents
of all other countries during specified time
period
• Provides understanding of performance of each
country’s economy in international markets
• Signals fundamental changes in country
competitiveness
• Assists policy makers in designing appropriate
public policies
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Aspects of the BOP
Accounting System
• Records international transactions made in
some time period
• Records only economic transactions
• Records transactions between residents of
one country and all other countries
– Residents include individuals, businesses,
government agencies, nonprofit organizations
• Uses a double-entry system
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Major Components of the BOP
Accounting System
Current Account
Capital Account
Official Reserves
Errors and Omissions
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Types of Current Account
Transactions
• Exports and imports of goods
• Exports and imports of services
• Investment income
• Gifts
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Capital Account
Foreign Direct
Investment
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Portfolio
Investment
Table 7.4 Capital Account Transactions
Maturity
Portfolio (shortterm)
One year or less
Motivation
Investment in or
facilitation of
international
commerce
Typical
Investments
Checking account
balances
Time deposits
Commercial paper
Bank loans
Portfolio (longterm)
More than one
year
Investment
income
Government bills,
notes, bonds
Corporate stocks,
bonds
Foreign Direct
Investment
Indeterminate
Active control of
organization
Foreign subsidiaries
Foreign factories
Joint ventures
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Table 7.5 BOP Entries, Capital Account
Debt (Outflow)
Portfolio (short-term)
Portfolio (long-term)
Foreign direct
investment
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Credit (Inflow)
Receiving a payment from a
foreigner
Making a payment to a
foreigner
Buying a short-term foreign
asset
Selling a domestic shortterm asset to a foreigner
Buying back a short-term
domestic asset from its
foreign owner
Selling a short-term
foreign asset acquired
previously
Buying back a long-term
domestic asset from its
foreign owner
Selling a domestic longterm asset to a foreigner
Buying a foreign asset for
purposes of control
Selling a long-term
foreign asset previously
acquired
Buying back from its foreign
owner a domestic asset
Selling a domestic asset
to a foreigner
Official Reserves Account
• Records level of official reserves
• Four types of assets
– Gold
– Convertible currencies
– SDRs
– Reserve positions at the IMF
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Official Reserves Account
Reserve
positions
Gold
Assets
SDRs
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Convertible
securities
Errors and Omissions
• BOP must balance
• Current Account + Capital Account +
Official Reserves Account = 0
• Current Account + Capital Account +
Official Reserves Account + Errors
and Omissions = 0
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Figure 7.7 The U.S. BOP
According to Various Reporting Measures
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