wild ib5e ppt instructor 10

Chapter 10 - 1International Business 5eCopyright © 2010 Pearson Education, Inc. publishing as Prentice Hall

InternationalMonetary System

Copyright © 2010 Pearson Education, Inc. publishing as Prentice Hall


International Business 5e Chapter 10 - 2

Chapter PreviewChapter 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



Currency Values and BusinessCurrency Values and Business

Exchange rates affect activities of both domestic and international firms

Devaluation Revaluation

import prices lowersraises

export priceslowersraises



Major World CurrenciesMajor World Currencies



Stability and PredictabilityStability and Predictability

Stableexchange rates

Predictableexchange rates

Improve accuracyof financial planningImprove accuracy

of financial planning

Reduce surprisesof unexpectedrate changes

Reduce surprisesof unexpectedrate changes



Value of U.S. DollarValue of U.S. Dollar



Law of One PriceLaw of One Price

Identical item must havean identical price in all countries

when expressed in a common currency

Identical item must havean identical price in all countries

when expressed in a common currency

McCurrencyMcCurrency

Undervaluedor overvaluedUndervaluedor overvalued

Limited use inbusiness decisions

Limited use inbusiness decisions

Fairly goodrate predictorFairly good

rate predictor



Big Mac IndexBig Mac Index



Purchasing Power ParityPurchasing Power Parity

Relative ability of two nations’ currenciesRelative ability of two nations’ currenciesto buy the same “basket” of goods into buy the same “basket” of goods in

those two nationsthose two nations

Relative ability of two nations’ currenciesRelative ability of two nations’ currenciesto buy the same “basket” of goods into buy the same “basket” of goods in

those two nationsthose two nations

Considers priceConsiders pricelevels in adjustinglevels in adjusting

relative currency valuesrelative currency values

Considers priceConsiders pricelevels in adjustinglevels in adjusting

relative currency valuesrelative currency values

Purchasing powerPurchasing powerof a currency isof a currency is

eroded by inflationeroded by inflation

Purchasing powerPurchasing powerof a currency isof a currency is

eroded by inflationeroded by inflation



Inflation: Key FactorsInflation: Key Factors

• Monetary policy directly affects interest rates and money supply

• Fiscal policy indirectly affects taxes and spending

• High employment raises wages, which are embodied in consumer prices

• High rates lower borrowing and spending,

which lowers inflation

• Exchange rates adjust to maintain PPP

Money supply

Employment

Interest rates

Adjustment



Fisher EffectFisher EffectFisher EffectFisher Effect

InternationalInternationalFisher EffectFisher Effect

InternationalInternationalFisher EffectFisher Effect

Nominal Interest rate =Nominal Interest rate =real interest rate + inflation ratereal interest rate + inflation rate

Nominal Interest rate =Nominal Interest rate =real interest rate + inflation ratereal interest rate + inflation rate

Difference in nominal interest ratesDifference in nominal interest ratessupported by two nations’ currenciessupported by two nations’ currencies

will cause an equal but oppositewill cause an equal but oppositechange in their spot exchange rateschange in their spot exchange rates

Difference in nominal interest ratesDifference in nominal interest ratessupported by two nations’ currenciessupported by two nations’ currencies

will cause an equal but oppositewill cause an equal but oppositechange in their spot exchange rateschange in their spot exchange rates

Interest RatesInterest Rates



Evaluating PPPEvaluating PPP

Addedcosts

Tradebarriers

Businessconfidence & psychology



Forecasting Exchange RatesForecasting Exchange Rates

Efficient (inefficient) market views

• Prices reflect (don’t reflect) all public information

Forecastingtechniques

• Fundamental analysis

• Technical analysis



Adjusting to Currency SwingsAdjusting to Currency Swings

Strong currency: Prune operations

Adapt products

Source abroad

Freeze prices

Export strategies in the face of currency swings

Weak currency: Source domestically

Grow at home

Push exports

Reduce expenses



Gold StandardGold Standard

International monetary system that linkedInternational monetary system that linkednations’ currencies to specific values of goldnations’ currencies to specific values of gold

International monetary system that linkedInternational monetary system that linkednations’ currencies to specific values of goldnations’ currencies to specific values of gold

Restricted monetary policies Restricted monetary policies

Reduced exchange-rate risk Reduced exchange-rate risk

Corrected trade imbalances Corrected trade imbalances

Ended by “competitive devaluation” Ended by “competitive devaluation”

In place from 1700s to 1939In place from 1700s to 1939 In place from 1700s to 1939In place from 1700s to 1939



Bretton Woods AgreementBretton Woods Agreement

International monetary system based onInternational monetary system based onvalue of U.S. dollar (1944 to 1973)value of U.S. dollar (1944 to 1973)

International monetary system based onInternational monetary system based onvalue of U.S. dollar (1944 to 1973)value of U.S. dollar (1944 to 1973)

Built-in flexibility Built-in flexibility

Fixed exchange rates Fixed exchange rates

World Bank and IMF World Bank and IMF

Ended by weak U.S. dollar Ended by weak U.S. dollar



Jamaica AgreementJamaica Agreement

Formalized the system of floating exchange ratesFormalized the system of floating exchange ratesas the new international monetary system (1976)as the new international monetary system (1976)Formalized the system of floating exchange ratesFormalized the system of floating exchange ratesas the new international monetary system (1976)as the new international monetary system (1976)

Managedfloat system

Currencies float withgovernment intervention

Managedfloat system

Currencies float withgovernment intervention

Freefloat system

Currencies float withoutgovernment intervention

Freefloat system

Currencies float withoutgovernment intervention



The System TodayThe System Today

Managed float systemManaged float system

Pegged exchange ratesPegged exchange rates

Currency boardCurrency board

European monetary systemEuropean monetary system



Recent Financial CrisesRecent Financial Crises

Developing nations

Mexico

Southeast Asia

Russia

Argentina



Chapter ReviewChapter Review

• 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

InternationalMonetary System


All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any

means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher.

Printed in the United States of America.


wild ib5e ppt instructor 10

Documents