The International Monetary System and the Balance of Payments Griffin & Pustay 7-1 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall International Business, 6th Edition chapter 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 7-2 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall 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 7-3 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall 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 7-4 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall 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 7-5 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall 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 7-6 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall 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 7-7 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Fixed Exchange Rate System 7-8 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall 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 7-9 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Map 7.1 The British Empire, 1913 7-10 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Major Components of the BOP Accounting System Current Account Capital Account Official Reserves Errors and Omissions 7-34 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Types of Current Account Transactions • Exports and imports of goods • Exports and imports of services • Investment income • Gifts 7-35 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Capital Account Foreign Direct Investment 7-36 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Portfolio Investment Table 7.4 Capital Account Transactions 7-37 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Table 7.5 BOP Entries, Capital Account Debt (Outflow) Portfolio (short-term) Portfolio (long-term) Foreign direct investment 7-38 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 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Official Reserves Account • Records level of official reserves • Four types of assets – Gold – Convertible currencies – SDRs – Reserve positions at the IMF 7-39 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Official Reserves Account Reserve positions Gold Assets SDRs 7-40 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Convertible securities Errors and Omissions • BOP must balance • Current Account + Capital Account + Official Reserves Account = • Current Account + Capital Account + Official Reserves Account + Errors and Omissions = 7-41 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Table 7.6 U.S Balance of Payments in 2007 7-42 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Figure 7.5a Leading U.S Merchandise Exports, 2007 7-43Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Figure 7.5b Leading U.S Merchandise Imports, 2007 7-44 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Figure 7.6 Trade Between the U.S and its Major Trading Partners, 2007 7-45 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall 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 7-46 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Figure 7.7 The U.S BOP According to Various Reporting Measures 7-47 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall 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 .. .Chapter Objectives • Discuss the role of the international monetary system in promoting international trade and investment • Explain the evolution... the International Monetary Fund in the post-World War II international monetary system established at Bretton Woods 7-2 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall Chapter. .. (dollar-based) • Created International Bank for Reconstruction and Development and International Monetary Fund 7-13 Copyright 2010 Pearson Education, Inc publishing as Prentice Hall International Bank