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The Monetary System in the International Arena - Coggle Diagram
The Monetary System in the International Arena
International Transactions
The foreign exchange market is where trillion of dollars worth of goods and services are traded across international borders each year.
Its participants include banks and other financial institutions, consumers, business firms, and governments.
There must be a way to change domestic into foreign money and vice versa.
Balance of Payments
A summary statement of all transactions that take place between a country and the world during a given period of time (a year).
Uses a double-entry system of bookkeeping. Transactions are recorded as debits and credits
The debit and credit entries must be equal.
Current and Capital Accounts
Current account records all transactions involving goods and services.
Capital account records all transactions involving short-term and long-term assets.
Balance of Payments Disequilibrium
The key between understanding imbalances is the distinction between:
Autonomous transactions (affected by factors outside of the balance of payments statement)
Exports, imports, transfers, public transactions and net capital movements.
Accomodating transactions
Occur in order to compensate for differences between payments and receipts arising from a country's autonomous transactions.
The Foreign Exchange Market
Where different national currencies are bought and sold
The exchange rate is the price of one nation's currency in terms of another's.
Indirect quotation
Direct quotation
Cross rate
Exchange Rates in the Business Context
Low exchange rate = trade surplus
High exchange rate = trade deficit
Spot or forward exchange rate
Bilateral or effective
Demand and Supply of Foreign Exchange
In a free market, exchange rates are set by the forces of demand and supply
The quantity of euros demanded is the amount that people would buy in a specific time period at a specific price
The quantity of euros supplied in the foreign exchange market is the amount that people would sell in a specific time period and at a specific price.
The equilibrium exchange rate is determined by the intersection of the demand and supply curves.
Exchange Rate Determination
The forces influencing the demand and supply of any currency include relative national incomes, relative national price levels, interest rates, and expectations about the future value of a currency.
Exchange Rate Regimes
Three basic exchange rate regimes have operated during the 20th century
Fixed Exchange Rate
Flexible Exchange Rate
Managed Exchange Rate
The
purchasing power parity
theory holds that exchange rates between two currencies adjust to reflect differences in the price levels between the two countries.