Economics: Global Economy and Monetary Systems PDF

# Economics - A social science that focuses on the production, distribution, and consumption of goods and services and analyzes the choices that individuals, businesses, governments, and nations make to allocate resources. - Assuming humans have unlimited wants within a world of limited means, econ...

# Economics - A social science that focuses on the production, distribution, and consumption of goods and services and analyzes the choices that individuals, businesses, governments, and nations make to allocate resources. - Assuming humans have unlimited wants within a world of limited means, economists analyze how resources are allocated for production, distribution, and consumption. # Global Economy - It is the result of human innovation and technological progress. It is characterized by the increasing integration of economies around the world through the movement of goods, services, and capital across borders. (IMF, 2008). - Trade of goods and services, financial and capital markets, technology and information, production and labor. # Globalization vs. Internalization - **Localization** is the adaptation of a particular product or service to one of those markets. - **Globalization** refers to the processes by which a company brings its business to the rest of the world. - **Internationalization** is the practice of designing products, services and internal operations to facilitate expansion into international markets. # Origins of Globalization - **International Trading Systems** - **Silk Road (Silk Route)** - First global trade route in history - 1,500 years; 130 BCE until 1453 CE - 6,437 kilometers (4,000 miles) - It is hard to overstate the importance of the Silk Road on history. Religion and ideas spread along the Silk Road just as fluidly as goods. Towns along the route grew into multicultural cities. The exchange of information gave rise to new technologies and innovations that would change the world. - **Galleon Trade** - Took place during the age of mercantilism (16th - 18th century) - Spanish sailing vessel that made an annual round trip (one vessel per year) across the Pacific between Manila in the Philippines, and Acapulco in present Mexico, during the period 1565-1815. They were the sole means of communication between Spain and its Philippine colony and served as an economic lifeline for the Spaniards in Manila. # International Monetary System - Provides the institutional framework for determining the rules and procedures for international payments, determination of exchange rates, and movement of capital. ## **Era of Bimetallism** - Before 1870, where both gold and silver coins were used as the international modes of payment. The exchange rates among currencies were determined by their gold or silver contents. Some countries were either on a gold or a silver standard. ## **Gold Standard** - 1875-1914, gold alone is assured of unrestricted coinage. There was a two-way convertibility between gold and national currencies at a stable ratio. - The gold standard is a monetary system in which paper money is freely convertible into a fixed amount of gold. - It is believed that this assures a stable economy with no inflation, a strong trade environment, and an efficient global trade system. - U.S. dollars were convertible to gold at a rate of \$20.67 per ounce. ### **Advantages** - The gold standard prevents inflation as governments and banks are unable to manipulate the money supply (e.g., overissuing money). The gold standard also stabilizes prices and foreign exchange rates. ### **Disadvantages** - Under the gold standard, the supply of gold cannot keep pace with its demand, and it is not flexible under trying economic times. Also, mining gold is costly and creates negative environmental externalities. - `"We have gold because we cannot trust governments." - President Herbert Hoover (1933)` ## **Bretton Woods System** - The Bretton Woods Agreement was negotiated in July 1944 by delegates from 44 countries at the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire. - Gold was the basis for the U.S. dollar and other currencies were pegged to the U.S. dollar's value. - Goals of creating an efficient foreign exchange system, preventing competitive devaluations of currencies, and promoting international economic growth. - \$35 per ounce - **International Monetary Fund (IMF)** - to monitor exchange rates and identify nations that needed global monetary support. - **World Bank** - to manage funds available for providing assistance to countries that had been physically and financially devastated by World War 2. ## **Fiat Monetary System** - "fiat" is a Latin word that is often translated as "it shall be" or "let it be done." - Fiat money is a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. - The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government. - **Floating rate system** ### **Floating Rate System** - A floating exchange rate is a regime where the currency price of a nation is set by the forex market based on supply and demand relative to other currencies. - Floating exchange rates became more popular after the failure of the gold standard and the Bretton Woods agreement. ### **Advantages of Fiat Money** - Gives central banks greater control over the economy - Is cost-efficient to produce - Provides governments with flexibility ### **Disadvantages of Fiat Money** - Is not a fool-proof way to protect the economy - Creates opportunity for a bubble - Provides risk of inflation - `"We accepted money as the medium by which things are exchanged, not the value for which they are."`