chapter five

Understanding the
International Monetary System

McGraw-Hill/Irwin
International Business, 11/e

Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives

Explain the functioning of the gold standard

Describe the purposes of the IMF
Appreciate the accomplishments of Bretton
Woods system and the ensuing developments
shaping the world monetary system
Describe the purpose of the World Banks
Discuss the purpose of the Bank for
International Settlements
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Learning Objectives
Discuss the floating exchange rate
system
Describe the development of the euro
Explain the role of the Balance of
Payments (BOP)
Discuss the major BOP accounts
Explain the use of Special Drawing
Rights (SDRs)
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Gold Standard
Gold Standard
The use of gold at an established number of
units per currency

Bretton Woods
The New Hampshire town where treasury
and central bank representatives met near
the end of World War II to establish the IMF,
the World Bank, and the gold exchange
standard
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International Monetary Fund

International Monetary Fund (IMF)
Institution that coordinates multilateral
monetary rules and their enforcement

Triffin paradox
The concept that a national currency that is
also a reserve currency will eventually run a
deficit, which eventually inspires a lack of
confidence in the reserve currency and
leads to a financial crisis.
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World Bank
World Bank
Institution that focuses on funding of
development projects

Bank for International Settlements

Institution that is the central bank for central
bankers

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Currency Exchange Rate Systems

Fixed currency exchange rates
Rates that governments agree on and undertake to
maintain

Floating currency exchanges rates

Rates that are allowed to float against other
currencies and are determined by market forces

Jamaica Agreement
The 1976 IMF agreement that allows flexible
exchange rates among members

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Current Currency Exchange Rate

Arrangements
Exchange arrangements with no
separate legal tender
Currency board arrangements
Other conventional fixed peg
arrangements
Pegged exchange rates within horizontal
bands
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Current Currency Exchange Rate

Arrangements
Crawling pegs
Exchange rates within crawling bands
Managed floating with no preannounced
path for the exchange rate
Independently floating exchange rates

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Euro

Currency of the European Union

12 EU members have joined the
European Monetary Union

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BOP Accounts
Table 5.1
Current account
Records a countrys exports and imports in
goods and services
Goods or merchandise account
Services account
Unilateral transfers

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BOP Accounts
Capital account
Records the net changes in a nations international
financial assets and liabilities
Direct investments
Portfolio Investments
Short-term capital flows

Official Reserves account

Records the assets held by the government; gold,
foreign currencies, and accounts in foreign banks; a
balance of the countrys foreign currency
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Table 5.1 U.S. International

Transactions (millions of dollars)

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Special Drawing Rights

Special Drawing Rights (SDR)

An international reserve asset established
by the IMF
The unit of account for the IMF and other
international organizations

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