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The International Monetary System and the Balance of Payments
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Chapter 7 - 1
Chapter 7
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
International Monetary System and
the Balance of Payments
Chapter 7 - 2
Learning Objectives
• Study the international monetary system in international trade and investment
• Explain the evolution and functioning of the gold standard
• Summarize the role of the World Bank Group and the IMF in the post—WWII international monetary system set up at Breton Woods
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Chapter 7 - 3
Learning Objectives
• Explore how the flexible exchange rate system evolved
• Describe the function and structure of the balance of payments accounting system
• Differentiate among the definitions of a balance of payments surplus and deficit
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Chapter 7 - 4
History of the International Monetary
System
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Chapter 7 - 5
Functions of the IMS
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Value and Exchange Currency
Balance of Payments System
Chapter 7 - 6
Summary of Discussion
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Chapter 7 - 7
Evolution and Functioning of the Gold
Standard
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Chapter 7 - 8
The Gold Standard
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Fixed Exchange
Rate System
Sterling-Based Gold Standard
Chapter 7 - 9
Collapse of Gold Standard
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•World War I•Great Depression•World War II
Chapter 7 - 10
Summary of Discussion
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Chapter 7 - 11
Role of the World Bank and the IMF in Post-WWII International Monetary
System
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Chapter 7 - 12
Bretton Woods Era
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Representatives of 44 Countries Met in 1945
Avoid Conditions That Caused WWII
Promote Global Peace and Prosperity
Chapter 7 - 13Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
The International Bank for Reconstruction and
Development
Reconstruct Europe
Assist Developing Countries
Official Name of the World Bank
Chapter 7 - 14
The World Bank Group
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International Bank for Reconstruction and Development (IBRD)
MultilateralInvestment
Guaranty Agency
International Development Association
International Finance
Corporation
Chapter 7 - 15
1. Boost international monetary cooperation
2. Facilitate international trade
3. Stabilize exchange arrangements
4. Foster multilateral payment system
5. Build confidence of members
6. Adjust international balance of payments
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International Monetary Fund
Chapter 7 - 16
IMF Membership
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The Quota System
Borrowing Power
Official Reserves
Voting Power
Chapter 7 - 17
Dollar-Based Gold Standard
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Fixed ExchangeRate
Adjustable PegSystem
Chapter 7 - 18
Challenges to the Bretton Woods System
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Value of British Pound
(1967)
Value of French Franc
(1969)
Chapter 7 - 19
The Triffin Paradox
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High International Liquidity
Low International LiquidityLess
More Less
More
Own
Dol
lars Sell Dollars
Chapter 7 - 20
The End of the Bretton Woods System
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Special Drawing Rights (1967)
President Nixon’s Speech
(1971)
Chapter 7 - 21
Summary of Discussion
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Chapter 7 - 22
Performance of the IMF Since 1971
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Chapter 7 - 23Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Flexible Exchange Rate
Supply and Demand
ManagedFloat
Chapter 7 - 24
International Conferences
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Jamaica Agreement
European Monetary System
The Louvre AccordThe Plaza Accord
Chapter 7 - 25
Start of the International Debt Crisis
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Soaring Oil Prices (1973 – 1974) and (1978 – 1979)
Chapter 7 - 26Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Debt Crisis Approaches
The Baker Plan
The Brady Plan
Chapter 7 - 27
Recent Financial Crises
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Asian CurrencyCrisis
SubprimeMeltdown
Chapter 7 - 28
Summary of Discussion
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Chapter 7 - 29
The Balance of Payments Accounting System
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Chapter 7 - 30
BOP Statistics
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EmergingMarkets
Business Climate
Foreign Exchange-Rate Reserves
Lending Risks
Chapter 7 - 31
Important Aspects of the BOP Accounting System
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Transactions
Time Period Monetary Value
Between Countries Double-Entry
Chapter 7 - 32
Major Components of the BOP System
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•Current Account
•Capital Account
•Official Reserves
•Errors and Omissions
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The Current Account
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Services of Capital
Merchandise Trade
Unilateral Transfers
Services Trade
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The Capital Account
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Foreign Direct Investment (FDI)Foreign Portfolio Investment (FPI)
Chapter 7 - 35
Inflows and Outflows of Capital in the BOP
System
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Current Account Transactions Credit Debit
Foreign Ownership of Assets Increases
Ownership of Foreign Assets Declines
Ownership of Foreign Assets Increases
Foreign Ownership of Assets Declines
Chapter 7 - 36
Official Reserves Account
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Gold SDRs
IMF ReservePositions
ConvertibleCurrencies
Chapter 7 - 37
Errors and Omissions
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InaccurateStatistics
Flight CapitalLegal
Transactions
Balancing the BOP
Chapter 7 - 38
Summary of Discussion
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Chapter 7 - 39
Defining Balance of Payments Surplus and
Deficit
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Chapter 7 - 40
Balance on Trade in Goods and Services
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•Manufacturing•Services Sector
Chapter 7 - 41
Additional Measures of Global Economic Performance
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Balance on Merchandise Trade
Balance on Services
Current Account Balance
Official Settlements Balance
Chapter 7 - 42
Summary of Discussion
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Chapter 7 - 43
Chapter 7
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
International Monetary System and
the Balance of Payments
Chapter 7 - 44Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
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