International Monetary Systems
Chapter 10
INTERNATIONAL
MONETARY SYSTEM
LEARNING OBJECTIVES
Describe the importance of exchange rates to business activites
Outline the factors that help determine exchange rates
Explain attempts to construct a system of fixed exchange rate
Describe efforts to create a system of floating exchange rates.
1. Importance of Exchange Rates
2. Factors that help determine exchange rates
Two important concepts:-
Law of Price
Purchasing Power Parity.
1.1 Exchanges rates do not guarantee or stabilize the buying power of currency.
1.2 Law of price states that an identical product (i.e. quality and content) must have identical price in countries where currency is the same.
2. Factors that help determine exchange rates, Cont’d...
1.3 expected vs. actual exchange rate = opportunity cost - benefit of buying product in one country at lower cost and selling at higher cost in another.
1.4. Law of price is useful in determining whether currency is over/under valued.(Big Mac)/Sales Tax imposed at different levels and varying marketing strategies used.
2.1 PPP is an economic theory that allows the comparison of the purchasing power of various world currencies to one another. It is a theoretical exchange rate that allows you to buy the same amount of good and services in every country.
Factors that help determine exchange rates, Cont’d...
3. Constructing a System of fixed exchange rates
4. Efforts to create a System of Floating Exchange Rates
4.1 A floating exchange rate is a regime where the a nation’s currency is set by the foreign exchange market based on supply and demand related to other currencies.
4.2 Hence, a system of floating exchange rate is a coordinated international monetary system
THE END