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The International Monetary System and the Balance of Payments

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chapter 7

The International Monetary System and the Balance of Payments

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Chapter Objectives

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

Chapter Objectives (continued)

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

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.

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.

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

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.

Fixed Exchange Rate System

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.

Map 7.1 The British Empire, 1913

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

Figure 7.1 The Contraction of World Trade, 1929-1933

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

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

Figure 7.2 Organization of the                 World Bank Group

Objectives of the
International Monetary Fund

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

Objectives of the
International Monetary Fund (continued)

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

Membership in the IMF

Open to any country willing to agree to rules and regulations

185 member countries as of 2008

Membership requires payment of a quota

A Dollar-Based Gold Standard

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

 

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

Performance of the International Monetary System since 1971

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

 

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

Table 7.1 The Groups of
Five, Seven, and Ten

Table 7.2 Key Central Banks

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

Map 7.2 Exchange Rate Arrangements as of 2007

Figure 7.3 Exchange Rates of Dollar vs. Yen, the Euro, and the Deutsche Mark, 1970-2005

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

 

Approaches to Resolve the International Debt Crisis

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.

Figure 7.4
The Asian Contagion

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

Four Important 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

Major Components of the BOP Accounting System

Types of Current Account Transactions

Exports and imports of goods

Exports and imports of services

Investment income

Gifts

Capital Account

Table 7.4 Capital Account Transactions

Table 7.5 BOP Entries, Capital Account

Official Reserves Account

Records level of official reserves

Four types of assets

–Gold
–Convertible currencies
–SDRs
–Reserve positions at the IMF

Official Reserves Account

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

Table 7.6. U.S. Balance of Payments in 2007

Figure 7.5a. Leading U.S. Merchandise                           Exports,  2007

Figure 7.5b. Leading U.S. Merchandise                           Imports,  2007

Figure 7.6. Trade Between the U.S. and its Major Trading Partners, 2007

Defining BOPs Surpluses and Deficits

Official Settlements Balance reflects changes in a country’s official reserves; essentially, it records the net impact of the Central Bank’s intervention in the foreign-exchange market in support of the local currency

Figure 7.7 The U.S. BOP
According to Various Reporting Measures

 

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

 

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

 

 
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Ditulis oleh pada 24/08/2012 in Akutansi International

 

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