International Monetary System Analysis Quiz

International Monetary System

• Before World War I, currencies were fixed in terms of gold, and after World War II, they were fixed in terms of the US dollar.

International Policy Coordination

• The international economy consists of sovereign nations, each with its own economic policies, which can affect other countries.
• Differences in goals among countries can lead to conflicts of interest, and coordination of policies is crucial to achieve harmony.

International Capital Market

• The International Capital Market is a system for buying and selling securities across borders, allowing nations to borrow and invest globally.
• Government policies toward international trade are often determined by the relative power of different interest groups within countries.

Balance of Payments

• The balance of payments (BOP) is a country's financial report card, tracking its international transactions over time.
• BOP consists of three main components: current, capital, and financial accounts, and an additional component, Gross Capital Flow.
• Understanding the BOP requires an economic analysis of its context, including foreign direct investment by multinational corporations.

Exchange Rate Determination

• Exchange rate is the ratio at which one currency is converted into another currency.
• Historically, exchange rates were fixed by government action, but now they are determined in the marketplace.
• Central banks were responsible for maintaining fixed exchange rates with respect to the dollar for each currency.

Historical Background

• David Hume's essay "Of the Balance of Trade" (1758) is considered the first economic model.
• The debates over British trade policy in the early 19th century contributed to the development of economics as a model-oriented subject.
• In the early 21st century, nations are more closely linked than ever before through trade, flows of money, and investment in each other's economies.

Importance of International Monetary System

• The international monetary system binds national economies together, providing order and stability to foreign-exchange markets.
• It encourages the elimination of balance-of-payments problems and provides access to international credits in the event of shocks.
• An adequately functioning international monetary mechanism is necessary for nations to efficiently exploit the gains from trade and foreign lending.