1. International
Monetary System

2. International Business 3e
Chapter Preview
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
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International Business 3e

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

4. Strong Currency: Curse or Cure?
Export strategies in the face of a strong currency
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
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International Business 3e

5. Stability and Predictability
Stable exchange rates
Improve accuracy of financial planning
Predictable exchange rates
Reduce surprises of unexpected rate changes
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International Business 3e

6. International Business 3e
Law of One Price
Identical item must have an identical price in all countries when expressed in a common currency
Big MacCurrencies
Undervalued or overvalued
Fairly good rate predictor
Limited use in business decisions
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International Business 3e

7. 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
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International Business 3e

8. Inflation: Key Factors
Money supply
Monetary policy directly affects interest rates and money supply
Fiscal policy indirectly affects taxes and spending
Employment
High employment raises wages, which are embodied in consumer prices
Interest rates
High rates lower borrowing and spending, which lowers inflation
Adjustment
Exchange rates adjust to maintain PPP
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International Business 3e

9. International Business 3e
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
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International Business 3e

10. International Business 3e
Evaluating PPP
Added costs
Business confidence & psychology
Trade barriers
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International Business 3e

11. Forecasting Exchange Rates
Efficient (inefficient) market views
Prices reflect (don’t reflect) all public information
Forecasting techniques
Fundamental analysis
Technical analysis
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International Business 3e

12. International Business 3e
Gold Standard
International monetary system that linked nations’ currencies to specific values of gold
In place from 1700s to 1939
Reduced exchange-rate risk
Restricted monetary policies
Corrected trade imbalances
Ended by “competitive devaluation”
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International Business 3e

13. Bretton Woods Agreement
International monetary system based on value of US dollar (1944 to 1973)
Fixed exchange rates
Built-in flexibility
World Bank and IMF
Ended by weak US dollar
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International Business 3e

14. International Business 3e
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
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International Business 3e

15. International Business 3e
The System Today
Managed float system
Pegged exchange rates
Currency board
European monetary system
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International Business 3e

16. Recent Financial Crises
Developing nations’ debt crisis
Mexico
Southeast Asia
Russia
Argentina
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International Business 3e