FINANCIAL ENVIRONMENT Chapter Three John Wiley & Sons, c 1998

Financial Environment Chapter Three 1. Historical Role of the US Dollar 2. The Gold Standard 3. The Interwar Years 4. Development of the Current International Monetary System 5. Fixed versus Floating Exchange Rates 6. Foreign and Foreign Exchange Rates 7. Balance of Payments John Wiley & Sons, c 1998

1. Historical Role of the US Dollar absence of a universal currency exchange of the dollar based on gold ounce common denominator in world trade the dollar in the 70’s, 80’s and 90’s. John Wiley & Sons, c 1998

2. The Gold Standard par values three major features problems system of fixed exchange rates limited rate of growth in a country’s money supply automatic adjustment tool problems John Wiley & Sons, c 1998

3. The Interwar Years 1919-1939 the English pound sterling position the US dollar position John Wiley & Sons, c 1998

4. Development of Today’s International Monetary System The Bretton Woods Conference in New Hampshire in 1944 ruled out return to the gold standard free floating exchange rates could not work need for a monetary system to recognize that exchange rates were both national and international John Wiley & Sons, c 1998

4. Development of an International Monetary System (cont) The International Monetary Fund (IMF) to promote international monetary cooperation to facilitate expansion and balanced growth of international trade to promote exchange stability to assist in establishment of a multilateral system of payments to give members temporary use of availability of funds to shorten duration and lessen degree of disequilibrium John Wiley & Sons, c 1998

4. Development of an International Monetary System (cont) The International Bank for Reconstruction and Development The World Bank Twin Crises oil prices foreign debt John Wiley & Sons, c 1998

5. Fixed versus Floating Exchange Rates problems free (clean) float managed float Exhibit 3-1 “Foreign Exchange Rate Fluctuations over Past 30 Years” Currency Blocs John Wiley & Sons, c 1998

6. Foreign Exchange and Foreign Exchange Rates Purchasing Power Parity (PPP) Exhibit 3-2 “ The Big Mac Index” Forecasting Exchange Rate Fluctuation Exhibit 3-3 “Factors Influencing Foreign Exchange Rates” Coping with Exchange Rate Fluctuations Spot versus Forward Foreign Exchange Exhibit 3-4 “Exchange Rates Fri May 23, 1997 Exchange Rate Pass Through John Wiley & Sons, c 1998

7. Balance of Payments Direct Investment Portfolio Investment Exhibit 3-5 US Balance of Payments 1980-1996 trade balance current account balance capital account Direct Investment Portfolio Investment The Internal and External Adjustments John Wiley & Sons, c 1998