International Business: Module 8 (final)

Balance of Payments (BOP)

- A record of a country's transactions with the rest of the world. • Shows flow of capital in and out of the country. • Reveals demand for a country's currency

The Bank for International Settlements (BIS)

- Institution for central bankers. • Operates to build cooperation in order to foster monetary and financial stability. • Known as most discrete financial institution in the world

BOP Accounts

- Use double-entry bookkeeping. • Payments to other countries are debits. • Payments from other countries are credits

Currency Exchange Controls

-Governments can control currency exchange of their currency and other currencies within their borders -Motivation is to manage foreign reserves -exchange rates usually above open market rates

Interest Rates

-a sustained increase in prices -rise with inflation

Inflation and Interest Rates

-determines real cost of borrowing in capital markets -rising rates encourage borrowing

Inflation Rates

-sustained increase in prices -currencies tend to weaken -cause the cost of the goods and services to rise, so they become less competitive globally

3 Types of Taxation

1. income tax 2. value-added tax (VAT) 3. withholding tax

Current Currency Arrangements

1.Exchange arrangement with no separate legal tender 2. Currency board agreement 3. conventional fixed-peg arrangement 4. Stabilized arrangement 5. crawling peg 6. crawling band 7. managed floating 8. free floating exchange rates

The Gold Standard

A monetary system that defines the value of its currency in terms of a fixed amount of gold -Established in Britain by Sir Isaac Newton in 1717 -Government does not have monetary flexibility

Reserves

Assets held by a nation's central bank, used to back up government liabilities

Who took the United States off the gold system? A. the Supreme Court B. President Eisenhower C. President Nixon D. President Kennedy

C. President Nixon

Problems of the gold standard include A. nations' willingness to agree to it B. its interference in the jewelry market C. storage cost, weight, doesn't earn interest D. its purity levels

C. storage cost, weight, doesn't earn interest

Bretton Woods led to an exchange rate agreement known as the Bretton Woods System or A. the floating rate system B. the India Accord system C. the gold exchange standard D. the French rate system

C. the gold exchange standard

Floating exchange rate

Determined by supply and demand that allow currency values to float against one another

Taxation

Effective tax management can yield a competitive advantage

In a currency board arrangement, a country's government commits to adopt the currency of another

False

The Bretton Woods system led to minimal growth in international trade but helped to reduce inflation levels

False

The International Monetary Fund uses the U.S. dollar as its a unit of account

False

The United States in recent years has had a significant deficit in its current account. This means that the U.S. citizens are exporting more than they are importing.

False

The balance of payments (BOPs) is a record of a country's transactions with its major trading partners

False

The law of one price states that in an efficient market, like products will never have like prices

False

The Bretton Woods System

The international monetary system in place from 1945 to 1971, with par value based on gold and the U.S. dollar -Fixed exchange rates -Par value -Reserves -Triffin paradox -Special drawing rights (SDR)

Countries put limitations on the convertibility of their currencies when they are concerned that their foreign reserves could be depleted.

True

Gold often serves as a way to store value during crisis

True

Fiscal policies

address the collecting and spending of money by the government

Technical analysis

analyzes date for trends and then projects these trends forward

Efficient Market Approach

assumption that current market prices fully reflect all available relevant information

Random walk hypothesis

assumption that the unpredictability of factors suggests that the best predictor of tomorrow's prices is today's prices

Buyers and sellers want to do business in own currency to...

avoid risk that accompanies currency exchange

Fundamental approach

based on econometric models that attempt to capture the variables and their correct relationships

Convertible currencies

can be exchanged for other currencies without restrictions

U.S. dollar most used ________ since end of WWII

central reserve

Monetary policies

control the amount of money in circulation and its growth rate

Fixed exchange rates

currency's value is tied to the value of another currency or gold

Forward rate

exchange rate between two currencies for delivery in the future, usually 30, 60, 90, or 180 days

Spot rate

exchange rate between two currencies for delivery within two business days

Jamaica Agreement established ______ among IMF members

flexible exchange rates

Bid price

highest-priced buy order currently in the market

Ask price

lowest-priced sell order currently in the market

Forward currency

market for currency contracts deliverable 30, 60, 90, or 180 days in the future

Current account deficit

may mean economic problems such as inflation OR that demand into the country exceed soutward flows

Triffin paradox

national currency that is also a reserve currency will eventually run a deficit, leading to lack of confidence in the reserve currency and a financial crisis

IMF would like a _________ to become main reserve

non-national asset

Stabilized arrangement

pegged exchange rate within a horizontal band

Reciprocal currency

quoted as dollars per unit of currency instead of in units of currency per dollar

Official reserves

reflect gold imports and exports

International Fischer effect

says the interest rate differentials for any two currencies will reflect the expected change in their exchange rates

Fisher effect

shows relationship between real and nominal interest rates

Par value

stated value

Vehicle currency used as a vehicle for international trade or investment...

such as diamond markt uses U.S. dollar

Law of one price concept says...

that in an efficient market, like products will have like prices

Purchasing Power Parity

the amount of adjustment that must be made in the exchange rates for two currencies for them to have equivalent purchasing power

Intervention currency used to intervene in...

the foreign currency exchange markets

Arbitrage

the process of buying and selling instantaneously to make profit with no risk

Special drawing rights (SDR)

the unit of account for the IMF and other international organizations

Holding large amounts of U.S. dollars eventually means...

they will lose value (Triffin paradox)

Capital account

tracks financial assets and liabilities, direct investment, portfolio investment, short-term capital flows

Current account

tracks tangible goods such as services and intangibles such as aid

nonconvertible currencies

value is arbitrarily fixed typically at a rate higher than its value in the free market and government imposes exchange controls

To understand deficit,

you must look at total picture

Fluctuating Currency Values

• The major currencies are allowed by their central banks to fluctuate freely against each other. • U.S. dollar • British pound sterling • Japanese yen • Euro