Ch. 7 International Monetary System and the Balance of Payments

Crawling Peg

Allowing the peg to change gradually over time.

Major components of the BOP system (4 basic accounts)

1. Current account 2. Capital account 3. Official reserves 4. Errors and omissions

What transactions does the *Current* Account record?

1. Exports and imports of goods (or merchandise) 2. Exports and imports of services 3. Investment income 4. Gifts (or unilateral transfers)

What transactions does the *Capital* Account record?

1. Foreign Direct Investment (FDI) 2. Foreign Portfolio Investment (FPI) - short-term FPI - long-term FPI

Quota

A deposit that a country must pay to become a member of the IMF--partly in gold and partly in the country's own currency.

Managed/Dirty Float

Central banks sometimes try to affect exchange rates by buying or selling currencies on the foreign-exchange market, so the exchange rates are not determined purely by private sector market forces.

Official Reserves Account

Comprised of 4 types of assets: 1. Gold 2. Convertible currencies 3. Special Drawing Rights (SDRs) 4. Reserve positions at the IMF

Gold Standard

Countries agree to buy or sell their paper currencies in exchange for gold on the requests of any individual or firm and to allow the free export of gold bullion and coins.

Errors and Omissions

Current account + capital account + official reserves account + *errors and omissions* = 0

International Monetary System

Establishes the rules by which countries value and exchange their currencies.

Jamaica Agreement

January 1976, each country was free to adopt whatever exchange rate system best met its own requirements.

Sterling-based Gold Standard

Most firms worldwide were willing to accept either gold or British pounds in settlement of transactions. (British pound sterling)

Par value

Official price in terms of gold.

Float

On Sept. 21, 1931, the pound's value would be determined by the forces of supply and demand and the Bank

BOP Accounting System

Records international transactions and supplies vital information about the health of a national economy and likely changes in its fiscal and monetary policies.

Official Reserves Account

Records the level of the official reserves held by a national government

Fixed exchange rate system

The price of a given currency does not change relative to each other currency.

Exchange rate

The price of one currency in terms of a second currency.