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The Monetary System in the International Arena - Coggle Diagram
The Monetary System in
the International Arena
The Foreign Exchange market
The foreign exchange market is where different national currencies are bought and sold.
International Treansactions
International transaction is a money transfer that crosses national borders, frequently involves two different currencies.
As a result of:
Buying goods, services, or assets from foreign countries
Balance of payments
It's define as a summary statement of all transactions that take place between a country and the rest of the world during a given period.
Balance of payments uses a double-entry system of bookkeeping.
Transactions are recorded as debits and credits.
Examples of Credit Transactions
Transfers from foreign residents
Sale of a long-term asset or increase of a long-term liability
Exports of goods and services
Examples of Debit Transactions
Acquisition of long-term assets or reduction of a long-term liability
Transfers to foreign residents
Imports of goods and services
Current and Capital Accounts
All transactions are placed into specific categories, in which the simplest breakdown is the current account and the capital account.
Current Accounts
The current account records all transactions involving goods and services.
Capital Accounts
The capital account records all transactions involving short-term and long-term assets.
Demand and Supply of foreign exchange
In a free market, exchange rates are set by the forces of demand and supply.
The equilibrium exchange rate is determined by the intersection of the demand and supply curves.
Exchange rates in the business context
An exchange rate is the value of a country's currency vs. that of another country or economic zone.
Balance of Payments Disequilibrium
A deficit or a surplus in the balance
of payments, the balance of payment should always be zero.
From a point of view, the existence of balance of payments deficits or surpluses is a frequent phenomenon
Purchasing power parity
PPP Theory holds that exchange rates between two currencies adjust to reflect differences in the price levels between the two countries
This means that the exchange rate between two countries should equal the ratio of the two countries' price level of a fixed basket.
Absolute PPP
Is based on the law of one price and refers to
the price levels between two countries.
Relative PPP
Presents that the rate of depreciations equals the difference in inflation rates between the two countries.
Exchange rate determination
Interest Rates
A higher interest rate will exert a much grates influence on exchange rates than will trade flows
Expectations
Market fundamentals, trade flows, inflation, interest rates, the government's fiscal and monetary policies, prompt investors and foreign exchange dealers to form expectation about the future value of the currency.
Relative price levels
If inflation is higher in the X country, exporting becomes more difficult as foreign goods become comparatively cheaper
Relative National Incomes
When incomes abroad raise, there is an increases demand for US good, hence the demand for dollars increases as foreign residents supply more foreign currency in exchange for dollars.
Exchange rate regimes
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Advantages & Disadvantages of fixed and flexible exchange rates
Economic policy independence
International monetary stability
Economic policy independence
This rule is to ensure that a country's inflation rate does not diverge from the average of its main trading partners.
The Adjustment mechanism
Managed exchange rates
Is used where monetary authorities intervene in varying degrees in order to influence the exchange rate in the desired direction by the purchase and sale of foreign currencies
Flexible exchange rates
flexible or freely floating exchange rate system the monetary authorities do not intervene in the foreign exchange market.
Fixed Exchange rates
A fixed exchange rate is pegged at a certain level by the national monetary authorities and can only be changed by a government decision.
International Monetary system
It's define as a network effecting international payments through institutions, rules and regulation; in order to fulfill its role effectively, they posses the following characteristics
The choice of the unit of account that is the agreed measure of the value of currencies.
International cooperation with respect to adjustment methods, concerted intervention and reserve assets.
Promotion of free international trade so that productive resources are optimally allocated.
Time element regarding the elimination of balance of payment disequilibrium among countries, that is countries must be allowed sufficient time to adjust without sever recessions or high inflation but, at the same time, should not be allowed to avoid adjustment at the expense of other countries.
The Gold standard
It was a system whereby the values of currencies were fixed relative to the value of gold, which was used as a unit of account and the main reserve asset.
