International Trade IBT 2-9 PDF

CHAPTER 2: INTERNATIONATIONAL TRADE WHAT IS TRADE? - the transfer of goods and services from one person or entity to another, often in exchange for money What is the difference between DOMESTIC and INTERNATIONAL TRADE? - The exchange of goods and services between countries and...

CHAPTER 2: INTERNATIONATIONAL TRADE WHAT IS TRADE? - the transfer of goods and services from one person or entity to another, often in exchange for money What is the difference between DOMESTIC and INTERNATIONAL TRADE? - The exchange of goods and services between countries and across borders is referred to as international trade. - Domestic trade happens when this business is conducted inside of a country’s borders. INTERNATIONAL TRADE THEORIES are simply the different theories that explains International Trade. It justifies why a company does international trade. 1. Mercantilism 2. Absolute Advantage 3. Comparative Advantage 4. Country Similar Theory 5. Product Life Cycle Theory 6. Global Strategic Rivalry Theory 7. Porter’s National Competitive Advantage Theory MERCANTILISM - An economic theory that was popular from the 16th to 18th centuries - This is when a country should grow its reserve of gold and silver by encouraging exports and discouraging imports. ABSOLUTE ADVANTAGE THEORY - Economic concept developed by Adam Smith in the 18th century - A country that can produce goods or services more efficiently than other countries COMPARATIVE ADVANTAGE THEORY - Economic concept developed by David Ricardo in the 19th century - A country can produce goods or services at a lower opportunity cost compared to another country. COUNTRY SIMILAR THEORY - Developed by Swedish economist Steffan Linder in 1961 - An economic theory that states that countries are more likely to trade with each other if they have similar levels of economic development, institutional structures and cultural characteristics. PRODUCT LIFE CYLE THEORY - Economic theory that describes the stages a product goes through its life cycle from its development to eventual decline. GLOBAL STRATEGIC RIVALRY THEORY - This economic theory emerged in the 1980s and was based on the work of economists Paul Krugman and Kevin Lancaster - Under this theory, the companies focus on how to get competitive advantage when competing against global firms in the same industry PORTER’S NATIONAL COMPETITIVE THEORY - Developed by Harvard Business School Professor Michael Porter - The theory argues that the nation’s competitiveness is based on a number of factors, including quality of its infrastructure, availability of skilled labor, level of government support and strength of its institutions. TRADE BARRIERS Trade barriers are government-induced restrictions on international trade. This maybe any regulation or policy that restricts international trade The types of trade barriers can be categorized between: TARIFFS- are taxes imposed on imported goods. It raise the price of imported goods relative to domestic goods. NON- TARIFF BARRIERS- - A non-tariff barrier is any measure, other than customs tariff, that acts as a barrier to international trade. Examples of Non-Tariff Barriers - Import Bans - General or specific quotas - Complex/discriminatory Rules of Origin - Quality Conditions imposed by the importing country on exporting countries - Additional trade documents like Certificate of Origin, etc. - Occupational safety and health regulation - Export subsidies - Quota shares CHAPTER 3: INTRODUCTION TO FDI - Foreign Direct Investment (FDI) involves an investor buying a significant interest in a company in another country. BENEFITS OF FDI Stimulation of Economic Development Increased employment Resource Development Reduced Costs Increased Productivity Increased in Country’s income TYPES OF FDI 1. Horizontal FDI is when a company establishes the same type of business operation in a foreign country as it operates in its home country 2. Vertical FDI is when a business acquires a complementary business in another country 3. Conglomerate FDI is when a company invests in a foreign business that is unrelated to its core business 4. Platform FDI is when a business expands into a foreign country, but the products manufactured are exported to another, third country FDI vs FPI What is Foreign Portfolio Investment (FPI)? - FPI is the purchase of securities of foreign countries such as stocks and bonds - FDI involves a long-term commitment while FPI is a short-term investment - With FPI, an investor does not have direct control over the assets or the businesses. In contrast, FDI lets an investor purchase a direct business interest in a foreign country. THEORIES OF FDI 1. Product Life Cycle Theory - This theory, developed by Raymond Vernon, postulates that firms invest abroad at different stages of a product’s life cycle. 2. Eclectic Paradigm - Proposed by John Dunning, this theory combines three factors: Ownership advantages, Location advantages, and Internalization advantages 3. Market Power Theory - This theory suggests that firms engage in FDI to increase their market power and reduce competition 4. Internalization Theory - This theory suggests FDI occurs when a firm internalizes certain advantages such as technology, brand or management expertise. CHAPTER 4: WHAT IS MNE? Multinational Enterprise (MNE) is a firm that operates in multiple countries. For a firm to be an MNE, the following criteria need to be fulfilled: Should own or control operations in multiple countries Should generate a substantial portion of its revenues by its foreign operations Should employ workforce from multiple countries Should have a strategic management perspective and a vision of multinational operations. THE DEGREE OF INTERNALIZATION TRANSNATIONALITY INDEX (TNI) measures the degree to which a company operates internationally, calculated as the average of three ratios: ▪ Foreign assets to total assets ▪ Foreign sales to total sales ▪ Foreign employment to total employment INTERNATIONALIZATION INDEX (III) evaluates the extent to which a company internalizes its operations across borders. This is simply the ratio of the number of foreign affiliates to the total number of affiliates in the firm. EFFECTS OF MNEs POSITIVE NEGATIVE - Provide knowledge Influencing host-country government decisions - Bring in FDI Transfer of inappropriate technology - Transfer of Technology Cultural imperialism - Promote competition Exploitation of host country resources - Promote research and Perceived as agents of neo-colonialism development Promotes hostile mergers and acquisitions - Benefit customers Crowding out domestic entrepreneurship - Promote exports in the host Limited benefits to host countries economies Circumventing host countries’ regulatory framework MNE from EMERGING/ DEVELOPING ECONOMIES (DMNE) A developed market multinational enterprise (DMNE) is a company that operates in multiple countries and is headquartered in a developed market, such as the United States, Japan, or Western Europe. TYPICAL FEATURES of DMNEs ▪ Internalization Patterns ▪ Focus on Other Developing Markets ▪ Reliance on Third Parties ▪ Governance ▪ Industry Domain ▪ Bargaining Power ▪ Strategy DMNEs ADVANTAGES in GLOBAL MARKETS ❖ HOME GOVERNMENT SUPPORT ❑ Impact of the DMNE on the national economy ❑ Shields the firm from the marketplace, hampering its capability development ❖ FLEXIBILITY ❑ Lower production scale permits flexibility and adaptation ❑ Less investment sunk in older plants and technologies WHAT IS SMIE or International SMEs? - SMIE is a small to medium sized organization. - SMIEs account for approximately 94% of all international firms - They often face serious obstacles to Internalization SME INTERNATIONALIZATION FEATURES - Internalization Patterns - SMIE Exporter Profile - Exporter Demographics - SMIE Foreign Investment Profile - Chance Expansion - Nature of FDI by SMIEs ❑ Emphasis on Developed Markets ❑ Selective Globalization ❑ Strategy SME OBSTACLES IN INTERNALIZATION ▪ Scale and Transaction Constraints ▪ Access to Capital ▪ Lack of Knowledge ▪ Lack of Market Power ▪ Vulnerability to Intellectual Property Violations CHAPTER 5: WHAT IS CULTURE? The knowledge, beliefs, art law, morals, customs and other capabilities of one group distinguishing it from other groups. Main features of culture: - Culture is shared - Culture is intangible - Culture is confirmed by others CULTURE AND INTERNATIONAL BUSINESS - Culture is very important to the practice of International Business - Management, decision making and negotiations are all influence through culture - Culture influences nearly all business functions from accounting to finance to production to service. - Culture is a key ingredient in the “liability of foreign-ness” - Culture is what makes international business practice difficult or easy - Culture is both divisive and unifying CORRELATES OF CULTURE - Culture is correlated with other variables that vary cross-nationally, like language and religion - Culture often cuts across religious, linguistic and national borders and vice versa i.e. religious, linguistic and national boundaries also often cut across cultures LANGUAGE - Language is a means by which we communicate verbally - We use it for socialization and for communicating how values and norms are expressed and understood - There are approximately 20 different language families that cut across national borders - Not only are words different, but also syntax and usages are also quite different between language families - The artifacts that surround language are: ✓ Linguistics ✓ Proxemics ✓ Pragmatics ✓ Nonverbals - English has become the business world’s lingua franca, and the number one foreign language taught in other countries RELIGION - Religion contains key values and norms that are reflected in adherents’ way of life - People try to adopt business practices that will satisfy religious tenets without sacrificing modern practices in business NATIONAL CULTURE CLASSIFICATIONS - Culture and Nation are not synonymous - National and cultural boundaries overlap partially, and there will be cultural differences in almost all nations - Scholars have created cultural typologies that try to describe cultural differences and ascribe them to national boundaries - HOFSTEDE’S DIMENSIONS OF CULTURE - Hofstede’s survey revealed six underlying dimensions of culture: ❑ Power Distance ❑ Uncertainty Avoidance ❑ Individualism/ Collectivism ❑ Masculinity/Feminity ❑ Long-Term Orientation ❑ Indulgence / Restraint TROMPENAARS AND HAMPDEN-TURNER CLASSIFICATION - Trompenaars and Hampden-Turner defined seven dimensions of culture: ✓ Universalism vs particularism ✓ Communitarianism vs individualism ✓ Neutral vs emotional ✓ Diffuse vs specific ✓ Achievement vs ascription ✓ Attitudes to time ✓ Attitudes toward the environment OTHER LAYERS OF CULTURE ETHNICITY – significant ethnic communities exist in many countries likely to affect a myriad of issues INDUSTRY – important layer of culture DEMOGRAPHICS – education, age, seniority and hierarchical level affect difference in values IDEOLOGY – not always consistent with cultures and can vary along time and across regions KEY CULTURAL ISSUES - CULTURAL ETIQUETTE – the manners and behavior that are expected in a given situation - CULTURAL STEREOTYPES – our beliefs about others, their attitudes and behavior ❑ Ethnocentric ❑ Auto-stereotypes ❑ Hetero-stereotypes KEY CULTURAL ISSUES - CULTURAL DISTANCE – the extent to which cultures differ from each other - CONVERGENCE AND DIVERGENCE ❑ Convergence Hypothesis – assumes that the combination of technology and economics is making countries more alike ❑ Divergence Hypothesis – assumes that countries will continue to maintain their distinctive characteristics CHAPTER 6: THE POLITICAL ENVIRONMENT - Politics play an important role in International Business - Political behavior is defined as the acquisition, development, securing and use of power in relation to other entities THE INSTITUTIONAL CONTEXT - Organizations work closely with governments and political groups in a pluralistic environment - Business objectives usually require the cooperation of political authority. Businesses work with government officials and ministries to clear the way for operations. - The ease of this work is dependent on the institutional context faced during negotiations. - Businesses sometimes work with governments that are similar to their own. Affinity between company and political groups, with common understanding, makes the work easier. - Sometimes, however, businesses work with governments that are very different. This presents an animosity of systems that make the work more frustrating and difficult THE MNE-GOVERNMENT RELATIONSHIP - Relationships between governments in the home and host countries are important issue facing Multinational Enterprise. - Governments affect the economic and legal environment ❑ Set monetary and tax policies, price controls and intellectual property regulations ❑ Influence labor relations, trade policies, capital and exchange controls, and transfer pricing policies ❑ Can be a regulator, a legislator, a competitor, a customer, a distributor, and a potential partner THE MNE RELATIONSHIP with HOST GOVERNMENT - Political power and size have a great deal to do with how MNEs deal with host governments. - Models like Sovereignty at Bay, Dependency and Neo-Mercantilism all assume a powerful MNE interacting with a less powerful developing country - Some assume that MNEs may not act in the best interest and pursue institutional hegemony and control over the less developing country - COOPETITION – a simultaneous cooperation and competition between MNE and host. - MNE compete with hosts in establishing policy that is favorable - They cooperate with hosts in providing what governments want:  Capital  Employment  Revenues  Legitimacy THE BARGAINING POWER of the MNE and the HOST GOVERNMENT - Host bargaining power comes from creating an attractive environment - MNE bargaining power comes from: ❑ Proprietary technologies or products ❑ Capital ❑ Potential tax revenue ❑ Big exports ❑ Employment ❑ Complex management requirements ❑ Political/economic alliances GOVERNMENT INVESTMENT SUPPORT - Government competes fiercely for investment. They frequently provide incentives to companies seeking to invest. These could include: ❑ Grants and Investment allowances ❑ Subsidies ❑ Preferential Tax Treatment ❑ Import Duty Exemptions ❑ Loans ❑ Loan Guarantees ❑ Interest Subsidies THE MNE and its HOME GOVERNMENT - The home government remains important to MNEs ❑ Provides its main operating environment ❑ Helps negotiate its international affairs and incentives ❑ Provides its own incentives for foreign investment to targeted areas ❑ The home government can even close the home environment to competition POLITICAL RISK - POLITICAL RISK is the probability of disruption of operation from political forces or events and their correlates. - Risk comes from instability, whether political, economic, regulatory, policy oriented, judicial and conflict oriented THE MEASUREMENT OF POLITICAL RISK - The political landscape is difficult to forecast. - Political risk can result from shifting power or balance. - Methods of measuring political risk: ❑ Qualitative approaches ❑ Aggregates of expert opinions ❑ Scenario approaches ❑ Decision-free methods ❑ Quantitative techniques TYPES OF POLITICAL RISK 1. OWNERSHIP RISK – potential threats to ownership from nationalization or seizure 2. OPERATIONAL RISK - threats governments impose for “changing the rules of the game” 3. TRANSFER RISK – impediments to the transfer of production factors, products or capital THE LEGAL ENVIRONMENT 1. THE COMMON LAW SYSTEM ❑ An independent judicial system that relies legislative action, judicial interpretation thru case precedent and application by users 2. CIVIL LAW SYSTEM ❑ Relies almost exclusively on a legal code that is applied universally ❑ Less flexible than common law system and requires frequent government intervention 3. THE THEOCRATIC SYSTEM ❑ Uses religious codes to create a legal system LEGAL JURISDICTION - Legal jurisdiction is the prevailing legal authority under which a legal case can be judged. - Jurisdictional Levels ❑ International ❑ Regional-global ❑ National - International Jurisdiction ❑ International law rarely enforced ❑ Parties often agree in advance to an arbitration authority ❑ Recent globalization of International business regulations - Regional Jurisdiction ❑ Regional bodies enacting and enforcing laws  - National Jurisdiction ❑ MNEs to comply with both domestic at home and foreign jurisdictions LEGAL ISSUES OF INTEREST 1. PRODUCT ORIGIN Laws frequently determine duties and tariffs to be paid 2. COMPETITION Laws, like antitrust regulations and insider trading laws, vary widely from country to country 3. Marketing and Distribution Laws determine allowable practices and these also vary widely 4. Product Liability Laws determine liability and allowable damages for product safety. These vary widely CHAPTER 7: INTERNATIONAL ECONOMIC INTEGRATION - Economic Integration is concerned with: ❑ The removal of trade barriers or impediments between at least two participating nations ❑ The establishment of cooperation and coordination between them - Integration creates high levels of globalization and regionalization TYPES OF ECONOMIC INTEGRATION 1. FREE TRADE AREA – removes trade impediments among member nations 2. CUSTOMS UNION – adds common external economic initiatives to all member nations 3. COMMON MARKET – allows free trade of products and services; also allows free mobility of production factors like capital, labor and technology 4. ECONOMIC UNION – is a common market with unification of all monetary and fiscal policies 5. POLITICAL UNION – is where participating nations literally become one nation in an economic and political sense, with common parliament and political institutions GLOBAL-LEVEL COOPERATION AMONG NATIONS - The World Trade Organization (WTO), the World Bank, and the International Monetary Fund (IMF) are three fundamental institutions affecting global cooperation or nations. - The IMF and World Bank serve as a financial base for cooperation. - The WTO serves as the institutional foundation of the world trading system THE WORLD TRADE ORGANIZATION (WTO) - The WTO seeks to establish trade policy rules that help expand trade and improve world living standards. It does through: ❑ Administering Trade Agreements ❑ Serving as the forum for Trade Negotiations ❑ Settling Trade Disputes ❑ Reviewing National Trade Policies ❑ Assisting Developing Nations on Trade Policy Issues ❑ Cooperating with Other International Organizations THE INTERNATIONAL MONETARY FUND (IMF) - The IMF seeks to: ❑ Promote international monetary cooperation and expansion of international trade ❑ Reduce inequity in member nations’ balances of payments - The IMF is a key institution in the International Monetary System - Helps members defend their currencies against cyclical, seasonal or random currency fluctuations - The IMF seeks to establish sound monetary practices among member nations through: ❑ Promoting exchange stability ❑ Maintaining orderly exchange arrangements ❑ Helping members avoid serious exchange deprecations ❑ Placing reserves at the disposal of member nations who are in financial crisis, subject to safeguards and repayment - The IMF allows: ❑ Special Drawing Rights (SDRs), which are a unit of account and allow countries to peg their currencies against the five largest IMF members ❑ IMF members settle transactions with SDR for exchanges among themselves THE WORLD BANK GROUP - The World Bank is owned by the governments of 160 nations - Its capital is provided by subscription, and it finances its operations primarily through world capital markets - It is financed by interest payments from borrower nations - Loans are geared toward Advanced Developing Nations and must be used for productive purposes like financing, infrastructure, telecommunications, ports and power. - The World Bank is formally known as the International Bank for Reconstruction and Development - The World Bank is tied with three affiliates The International Development Association (IDA) The International Finance Corporation (IFC) The Multilateral Investment Guarantee Agency (MIGA) - Their common objective is to help raise standards of living in developing nations by channeling financial resources to them from developed countries - The IDA concentrates on productive project in the least developed nations - The IFC assists in economic development of maturing countries by investing in private sector investments - The MIGA specializes in encouraging equity investment and foreign direct investment to developing countries by mitigating trade barriers POST WAR REGIONAL INTEGRATION - A total of 109 agreements from 1947 to 1994 - Features of Regional Integration: ❑ Postwar regional integration centered in Western Europe ❑ Many developing countries renewed their interest in regional integration since the Uruguay Round began ❑ The level of economic integration varies widely among agreements REGIONAL LEVEL COOPERATION NORTH AMERICA – The North American Free Trade Agreement (NAFTA) - Established in 1992, implemented in 1994 - NAFTA created a tri-national market area between Canada, Mexico and United States - Dismantles trade barriers for industrial goods, and has agreements on services, investments, intellectual property rights, and agriculture - Side agreements on labor adjustments, environmental protection, import surges, child labor, minimum wages, productivity, health and safety standards EUROPE – The European Union (EU) - Established in 1957 as European Economic Community (EEC) and became European Community in 1995 (EC) - In 1992, the Maastricht Treaty created the European Common Market - The new name for the EC, after Maastricht, is the European Union  - Created the common European Currency the ECU or the Euro - Gives every citizen in member states a European Passport and free movement from one country to another within the EU - Removes all restrictions on capital movements among member states - Establishes a European Central Bank - Transforms the EU into the European Economic and Monetary Union ASIA PACIFIC - Asia accounts for 20% of world trade - APEC (Asia Pacific Economic Cooperation Forum) was founded in 1994 and consists of 18 member nations - ASEAN (Association of Southeast Asian Nations) was founded in 1967 by Malaysia, Indonesia, Philippines, Singapore and Thailand - There are less formal agreements bilaterally and multilaterally in abundance - Also has numerous sub-regional economic trade zones LATIN AMERICA - Early attempts were the Latin American Free Trade Association (LAFTA) and the Central American Common Market (CACM). Both failed economically and politically. - LAFTA was superceded by the Latin American Integration Association (LAIA), whose goal was to increase bilateral trade among member nations - MERCOSUR was established in 1995 as an organization to promote trade in South America AFRICA and the MIDDLE EAST - The Economic Community of West African States (ECOWAS) – established in 1975 by West African states - Central African Economic and Customs Union – established in 1966 in former French Africa - Preferential Trade Area (PTA) – established in 1981 from former members of the East African Economic Community - Gulf Cooperation Council (GCC) – Middle East free trade area established in 1981 COMMODITY LEVEL COOPERATION AMONG NATIONS - Commodity Cartel – a group of producing countries that wish to protect themselves from price fluctuations of certain commodities traded internationally - Can control prices through production quotas and limiting overall output STRATEGIC RESPONSES of MNEs - Defensive Export Substituting – where firms defend market share previously achieved through exports - Offensive Export Substituting – ensures market penetration through direct investment before markets are officially integrated. - Rationalized Foreign Direct Investment – where Multinational Enterprises heighten resource commitment to operations to achieve new economies of scale in the wake of regionalization. CHAPTER 8: INTERNATIONAL MONETARY SYSTEM INTERNATIONAL MONETARY SYSTEM - International Monetary System (IMS) is a well-designed system that regulates the valuations and exchange of money across countries. - It is a well-governed system looking after the cross-border payments, exchange rates, and mobility of capital. This system has rules and regulations which help in computing the exchange rate and terms of international payments - In other words, International Monetary System mobilizes the capital from one nation to another by felicitating trade EVOLUTION OF THE INTERNATIONAL MONETARY SYSTEM - Bimetalissm : before 1875 - Classical Gold Standard: 1875-1914 - Interwar Period: 1915- 1944 - Bretton Woods System: 1945 – 1972 - The Flexible Exchange Rate Regime: 1973 to present Bimetalissm : before 1875 - Gold and Silver as International means of payment. The exchange rate among currencies was determined by either their gold or silver content Classical Gold Standard: 1875-1914 - The exchange rate between two country’s currencies would be determined by relative gold contents - Highly stable exchange rates under the classical gold standard provided an environment that was conducive to International Trade and Investment Interwar Period: 1915- 1944 - Characterised by ▪ Economic nationalism ▪ Attempts and failure to restore gold standard ▪ Economic and political instability - These factors highlighted some of the shortcomings of the Gold Standard Bretton Woods System: 1945 – 1972 - Creation of the International Monetary Fund and the World Bank - The US Dollar was pegged to Gold at $35 per ounce and other currencies were pegged to the US dollar - Each country was responsible for maintaining its exchange rate by buying or selling foreign exchange reserves as necessary The Flexible Exchange Rate Regime: 1973 to present - Flexible exchange rates were declared acceptable to IMF memgers - Gold was abandoned as in international reserve asset - Non-oil exporting countries and less developed countries were given greater access to IMF funds CONTEMPORARY EXCHANGE RATE SYSTEMS - Fixed Rate System - Crawling Peg System - Target Zone Arrangement - Managed Float System THE BALANCE OF PAYMENTS - is an accounting statement that summarized all the economic transactions between residents of a home county and those of all other countries - An account deficit means more money is going out of a country to purchase goods than is coming in - An account surplus is its opposite  CHAPTER 9: INTERNATIONAL FOREIGN EXCHANGE (FX) MARKETS - Where individuals, businesses, governments and banks buy and sell foreign currencies - Major players include commercial banks, international corporations, Nonbank financial institutions. - Most important player is the Central bank FUNCTIONS OF INTERNATIONAL FOREIGN (FX) EXCHANGE MARKETS - Transfer of Purchasing Power/ Clearing function to facilitate the conversion of one currency to another, particularly in the case of exports and imports between countries - Credit Function facilitates the availability of credits for importers and exporters in International Trade - Hedging Function for future transaction when there is uncertainty in exchange rate VEHICLE CURRENCY - Currency that is used for trade transactions, especially when it is not the national currency of either the importer or the exporter - USD is the most popular and dominant currency used as vehicle currency for almost all kind of transactions between countries TYPES OF FOREIGN EXCHANGE (FX) TRANSACTIONS 1. Spot FX Transactions 2. Forward FX Transactions 3. Foreign Exchange Swaps 4. Options 5. Futures 1. Spot FX Transactions - Purchases and sales of FX for immediate delivery (2 working days in the interbank market) - Spot rate is the price of FX for immediate delivery 2. Forward FX Transactions - Purchases and sales of FX for future delivery (delivery date more that 2 working days in the future) - Forward rate is the price of FX for future delivery. Typical forward rates are for 1, 3, 6, 9 and 12 months. 3. Foreign Exchange Swaps are agreements to trade one currency for another now, and to trade currencies back again later, both prices agreed at the beginning 4. Options are contracts specifying the right to buy or sell foreign exchange within a specific period or on a specific date 5. Futures are contracts for forward delivery of currency for specific amounts with specific maturity dates FOREIGN EXCHANGE (FX) QUOTATIONS A. Currency pairs – depict a quotation of two different currencies in FX trading B. Base currency – the first currency in a currency pair. Exchange rates are quoted in per unit of the base currency C. Quote currency (also counter or terms currency)- the second currency in a currency pair BLACK MARKET VS PARALLEL MARKET - Black market also known as the parallel market, is where currencies are bought and sold in the informal market - It emerges as a response to the demand and supply dynamics that may not fully met by the official market. PROS CONS - Can provide more accurate picture of the true - Unregulated and illegal value of a currency - Difficult to obtain reliable date on the true value of - Can help prevent currency shortages and inflation a currency - Can help reduce government intervention in the - Can encourage illegal activities eg, money currency market laundering, tax evasion