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