MKTG 26 : International Marketing Chapter 3 : International Monetary System

PASIG CATHOLIC COLLEGE

Objective of the chapter 3Describe the development of today’s

international monetary system Explain how foreign exchange

transaction are conductedIdentify the problems associated with

exchange rate fluctuationsDiscuss the balance of payments

perspective of the United StatesExplain the creation of Eurodollars and

its monetary effect.

The Development of Today’s International Monetary System

A number of countries were wrestling political freedom from colonial rulers.

It did take long for these countries to realize that political freedom alone was not sufficient.

Economic prosperity was not only necessary for existence but mandatory for long-term survival and growth.

Countries realized that planned international cooperation fostered economic development and prosperity.

The Bretton Woods Conference

After world war II nations agreed to a framework on international rules – a code of behavior – to maintain monetary discipline and to ensure that dissenting nations did not frustrate economic development efforts through counteractions.

The Bretton Woods ConferenceNegotiation at Bretton Woods made certain

recommendation in 1944.Each nation should be at liberty to use

macroeconomic policies for full employment Free-floating exchange rates could not

work. Their ineffectiveness had been demonstrated during 1920s and 1930s. The extremes of both permanently fixed and free-floating rates should be avoided.

A monetary system was needed that would recognize that exchange rates were both a national and an international concern.

The International Monetary Fund

The International Monetary Fund (IMF) was established at Bretton woods, New Hampshire to oversee the newly agreed upon monetary system with original members of 55 and now are over 150 members.

The International Monetary FundThere are several major accomplishment to the

credit of the international Monetary System. Sustained a rapidly increasing volume of trade

and investment.Displayed flexibility in adapting to changes in

international commerce.Proved to be efficient( even when there

decreasing % of reserve to trade)Proved to be hardly( its survived a number of pre-

1971 crises, speculative and otherwise, and the down-and-up swings of several business cycles)

Allowed a growing degree of international cooperation.

Established a capacity to accommodate reforms and improvements.

The IMF and Debt Crisis

The debt crisis has a profound impact on the economic performance of developing countries. One of the most urgent tasks facing the international community is to find ways of reducing the drag exerted by the continuing debt overhang on economic growth in the developing world.

The IMF and Debt CrisisA framework to reduce the burden of

debt must have two elements. First, the debtors need to grow faster

and export move. Second, the cost of debt services

must fall.Note: With the right policies in both

industrial and developing countries, these elements can go hand in hand.

Fixed Versus Floating RatesExchange rate stability of any lasting duration

cannot be imposed externally by adoption of the pegged exchange rates and heavy official intervention in the foreign exchange market.

When the floating exchange rates were introduced, it was said that balance-of-payments adjustments would be facilitated, but not only have imbalances not disappeared, they have become worse.

It was thought that speculation would be curtailed. On the contrary, never has it assumed such proportions nor had such destabilizing effects.

Fixed Versus Floating RatesIt was believed that market forces, left at last

to their own devices, would determine the correct exchange rate balance. But never have imbalance been so great, nor fluctuation so wide and erratic and so little justified by economic fundamentals.

It was hoped that autonomy in economic and monetary policy would be preserved, allowing each country free choice of its monetary policy and rate of inflation. Facts have completely belied this illusion.

Foreign ExchangeForeign exchange is the monetary mechanism by which transaction involving two or more currencies take place.

Foreign exchange refers to the exchange of one country’s money for another country’s money.

Balance of PaymentsThe balance of payments of a country

summarizes all the transactions that have taken place between its residents and foreigners in a given period, usually a year.

The world transactions refers to export and imports of goods and services, lending and borrowing of funds, remittances, and government aid and military expenditures.

The terms residents includes all individuals and business enterprises, including financial institution, that are permanently residing within the country’s borders, as well as government agencies at all levels. ( can be included to Part I )

Balance of Payments

In other words, balance of payments reflects the totality of a country’s economic relations with the rest of the world: its trade in goods, its exchange of services, its purchase and sale of financial assets, and such important government transactions as foreign aid, military expenditures abroad, and the payment of reparation.

END OF CHAPTER 3

FOR INTERNATIONAL MARKETING