International Business

2020-11-10, 12:21 PMModule 4: International Monetary and Financial Systems

Page 1 of 13https://moodle.tru.ca/mod/book/tool/print/index.php?id=1072989

Module 4: International Monetary and Financial Systems Site: TRU Moodle Course: IBUS 3511_SW5 - International Business (Summer 2020 Power) Book: Module 4: International Monetary and Financial Systems Printed by: Sandeep Singh Date: Tuesday, 10 November 2020, 12:21 PM

Table of contents Learning Outcomes Lesson 10: Regional Economic Integration Lesson 11: International Financial Markets and Foreign Exchange Lesson 12: International Monetary Systems

Learning Outcomes After you successfully complete Module 4, you will be able to:

Discuss the reasons for the popularity of regional economic integration, and understand its impact on international business.

Develop an understanding of how the international financial system works as well as its implications for international business.

Provide insights into the international monetary system.

Lesson 10: Regional Economic Integration Overview Most countries today actively encourage international trade. They participate in treaties and organizations that work to provide a level playing field for international business. Individual countries also promote international trade through regional economicregional economic integrationintegration and co-operation pacts.

International trade suffered greatly between the two world wars because many countries imposed protectionist import barriers in the form of tariffs and quotas. These barriers partly contributed to the collapse of world economies and led to the Great Depression of the 1930s. With the aim of making sure that trade wars between countries did not threaten world peace, the leading industrial nations met in Havana in 1947 and signed the General Agreements on Tariff and Trade (GATT). GATT became a common platform for discussing international trade problems.

In 1995, the World Trade Organization (WTO) replaced GATT. Headquartered in Geneva, Switzerland. The goal of the WTO is to level the field for all players in international trade, which it does by promoting trade, reducing tariffs in international trade, and resolving trade disputes. Currently, 162 countries are members of the WTO, and 22 governments have observer status.

Most countries also encourage and promote international trade by entering into regional co-operation agreements that effectively form trade blocs. Such integration can take the form of a free trade agreement, customs customs unionunion, common marketcommon market, economiceconomic unionunion, or political political unionunion. The North American Free Trade Agreement (NAFTA) is an example of regional co-operation between the US, Canada, and Mexico. The new Canada-United States-Mexico Agreement is known as CUSMA. The European Union (EU) has accrued tremendous benefits to all its member countries, and its common currency, the euro, facilitates the flow of trade among most members.

2020-11-10, 12:21 PMModule 4: International Monetary and Financial Systems

Page 2 of 13https://moodle.tru.ca/mod/book/tool/print/index.php?id=1072989

Lesson 10 will help you understand the issues involved in international and regional economic co-operation and integration, and the role of bodies like the WTO, EU, and NAFTA/CUSMA.

Learning Objectives After you complete the work in Lesson 10, you should be able to:

Discuss the WTO, its origin, role, and the mechanisms it uses in solving international trade disputes.

Describe and distinguish among the five levels of regional economic integration.

Explain the benefits and drawbacks of regional economic integration.

Discuss the integration of Europe and the success of the EU.

Discuss regional economic integration in North America (NAFTA and CUSMA).

Discuss regional integration in Africa, South America, Oceania, and Asia.

Resources Here are the required resources for Lesson 10:

Textbook ReadingTextbook Reading Chapter 8: Regional Economic Integration

Web-Based ResourcesWeb-Based Resources WTO at https://www.wto.org

IMF at http://www.imf.org

Europa: Gateway to the European Union at https://europa.eu/european-union/index_en

EUbusiness at https://www.eubusiness.com/

UN at https://www.un.org/en/index.html

NAFTA at https://www.nafta-sec-alena.org

CUSMA (Canada–United States–Mexico Agreement) at https://international.gc.ca/trade-commerce/trade-agreements-accords- commerciaux/agr-acc/cusma-aceum/index.aspx?lang=eng

African Union (AU) at https://au.int/

Asia-Pacific Economic Cooperation (APEC) at https://www.apec.org/

Association of Southeast Asian Nations (ASEAN) at https://asean.org/

The Cooperation Council for the Arab States of the Gulf (GCC) at http://www.gcc-sg.org/en-us/Pages/default.aspx

Kirby, J. (2018, October 19). Here’s what the trade war has cost to the U.S. and Canada so far. Maclean’s. Retrieved from https://www.macleans.ca/economy/heres-what-the-trade-war-has-cost-the-u-s-and-canada-so-far/

Government of Canada. (2019, May 6). Canada and the World Trade Organization (WTO) . Retrieved from https://international.gc.ca/world-monde/international_relations-relations_internationales/wto-omc/index.aspx?lang=eng

2020-11-10, 12:21 PMModule 4: International Monetary and Financial Systems

Page 3 of 13https://moodle.tru.ca/mod/book/tool/print/index.php?id=1072989

Checklist: Vocabulary, Learning Activities, and Assessments Done?Done? TaskTask

Vocabulary List: Lesson 10

10.1: World Trade Organization (WTO)

10.2: Regional Economic Integration, NAFTA/CUSMA, and EU

10.3: Major Regional Trading Groups Worldwide

10.4: Reflective Journal — Topic for Lesson 10: Regional Economic Integration

Chapter 8 Practice Quiz

Vocabulary List: Lesson 10 Define and/or explain each of the following terms and acronyms. Write in your own words, rather than trying to memorize what is in the textbook.

ItemItem TermTerm DefinitionDefinition

1 regional economic integration

2 free trade area

3 customs union

4 common market

5 economic union

6 political union

7 trade creation

8 trade diversion

9 EU

10 NAFTA/CUSMA

Download Lesson 10: Activities Checklist and Vocabulary

Learning Activities 10.1: World Trade Organization (WTO) The General Agreement on Tariffs and Trade (GATT) was established in 1947, with the aim of reducing international trade wars and barriers. Eventually, the WTO replaced GATT as the umbrella organization to promote and supervise international trade.

After a thorough study of the Lesson 10 resources and additional Internet and library research, respond to the following:

1. Discuss in brief the origin and role of GATT. What is the importance of the Uruguay round of talks?

2020-11-10, 12:21 PMModule 4: International Monetary and Financial Systems

Page 4 of 13https://moodle.tru.ca/mod/book/tool/print/index.php?id=1072989

2. Discuss the evolution, role, organs, and functions of the WTO.

3. Discuss how the WTO handles international trade disputes between countries, and consider what powers it has to enforce its rulings.

4. China became a member of the WTO in 2011. Discuss the benefits and losses to China.

10.2: Regional Economic Integration, NAFTA/CUSMA, and EU Regional agreements to promote international trade have been set up in most regions of the world. The last few decades have seen a large growth in the regional trade blocs. The EU is one hugely successful example. Similarly, NAFTA has helped to encourage trade between the US, Canada, and Mexico. CUSMA, the new version of NAFTA, has created new challenges and opportunities for North American trade.

After a thorough study of the Lesson 10 resources and additional Internet and library research, respond to the following:

1. Discuss what you understand by regional economic integration.

2. List, discuss, and summarize the five different levels of regional economic integration.

3. Discuss the EU in detail, including its origin, role, organization, and governance.

4. Discuss how member countries benefit from the EU.

5. What are the PIIGS and why are they a threat to the stability of the EU?

6. Discuss NAFTA/CUSMA and its effects on member countries.

7. Discuss why some people oppose NAFTA/CUSMA.

10.3: Major Regional Trading Groups Worldwide Regional alliances have become common. There are nearly 200 such agreements in different parts of the world, although many of them do not have much impact.

This activity will help you understand some important trade blocs in the world.

After a thorough study of the Lesson 10 resources and additional Internet and library research, respond to the following:

1. Discuss two important trade blocks in Asia: Association of South East Asian Nations (ASEAN) and Asia Pacific Economic Cooperation (APEC).

2. Discuss important trade blocs in Africa (African Union) and the Middle East (Gulf Cooperation Council).

3. Discuss the instruments used by home country and host country to promote and restrict FDI.

4. Discuss important trade blocs in Latin America and Oceania.

10.4: Reflective Journal — Topic for Lesson 10: Regional Economic Integration Reflective Journal — Topic for Lesson 10: Regional Economic IntegrationReflective Journal — Topic for Lesson 10: Regional Economic Integration Read the article: Here’s What the Trade War Has Cost to the U.S. and Canada so Far (Kirby, 2018).

Respond to the following in your journal and post to the discussion forum:

1. Discuss the pros and cons of extending NAFTA/CUSMA to more advanced levels of economic (and political) integration.

2020-11-10, 12:21 PMModule 4: International Monetary and Financial Systems

Page 5 of 13https://moodle.tru.ca/mod/book/tool/print/index.php?id=1072989

2. Since the establishment of the EU, Europe has become the largest market in the world for goods and services, and the US has been relegated to second place. In the light of European experience, many people in the US and Canada advocate for a similar treaty arrangement, while an equal number of people oppose this position. Which side would you take? Discuss your views and reasons for your position.

Chapter 8 Practice Quiz Chapter 8 Practice QuizChapter 8 Practice Quiz Check your understanding of the vocabulary list items and basic concepts in the textbook reading before taking this quiz. If you have done the readings and answered the questions in the learning activities, then this online quiz should take approximately 5 to 10 minutes. You have 15 minutes in total to complete the quiz.

Assessments Assignment 4: International Finance and Monetary System (15%) Assignment 5: Country Profile for International Business (25%) Read the instructions for Assignment 4 and Assignment 5, which are both due at the end of Lesson 12.

Lesson 11: International Financial Markets and Foreign Exchange Overview International financial markets are undoubtedly one of the most important components of the international business system. In international business, commercial transactions use more than one currency. For example, when a Canadian firm buys garments from an Indian manufacturer, two currencies are involved: the Canadian dollar and the Indian rupee. Obviously, this requires some mechanisms to negotiate the exchange rateexchange rate between currencies. The international financial system is comprised of two components, the international capital markets and foreign exchange markets.

The international capital market is made up of individuals, business organizations, financial institutions, banks, and governments that want to invest or borrow money. The international capital market expands the money supply, reduces the costs of borrowing, and reduces the risk to lenders. London, Tokyo, and New York are the world’s leading international financial centres. They are supported by offshore financial centresoffshore financial centres in Dubai or the Cayman Islands. The main components of the international capital markets include the international bond marketinternational bond market, the international equity marketinternational equity market, and the eurocurrency marketeurocurrency market.

The second component of the international market is the foreign exchange market. This facilitates the conversion of one currency into another. Foreign exchange markets perform many functions, like currency conversion, currency hedgingcurrency hedging, and currency arbitragearbitrage. Many institutions participate in the process of currency conversion. Most governments around the world control foreign exchange and impose restricts on currency conversion.

Lesson 11 will help you understand the issues involved in international capital markets and foreign exchange markets.

Learning Objectives After you complete the work in Lesson 11, you should be able to:

Discuss the characteristics, functions, and financial centres of the international capital markets.

Discuss the functional components of the international capital market, and distinguish between international bond, international equity, and eurocurrency markets.

Discuss the functions of the foreign exchange market.

Discuss the operation of the foreign exchange market (spot marketspot market, forward forward marketmarket, futures marketfutures market, and operationsoperations

2020-11-10, 12:21 PMModule 4: International Monetary and Financial Systems

Page 6 of 13https://moodle.tru.ca/mod/book/tool/print/index.php?id=1072989

marketmarket).

Discuss currency conversion and why governments control foreign exchange.

Resources Here are the required resources for Lesson 11:

Textbook ReadingTextbook Reading Chapter 9: International Finance Markets

Web-Based ResourcesWeb-Based Resources WTO at https://www.wto.org

IMF at https://www.imf.org/external/index.htm

Europa: Gateway to the European Union at https://europa.eu/european-union/index_en

EUbusiness at https://www.eubusiness.com/

UN at https://www.un.org/en/index.html

NAFTA at https://www.nafta-sec-alena.org

CUSMA (Canada–United States–Mexico Agreement) at https://international.gc.ca/trade-commerce/trade-agreements-accords- commerciaux/agr-acc/cusma-aceum/index.aspx?lang=eng

Checklist: Vocabulary, Learning Activities, and Assessments Done?Done? TaskTask

Vocabulary List: Lesson 11

11.1: International Capital Markets

11.2: Foreign Exchange Market

11.3: Present-Day Foreign Exchange Markets and Government Control

11.4: Reflective Journal — Topic for Lesson 11: International Financial Markets and Foreign Exchange

Chapter 9 Practice Quiz

Vocabulary List: Lesson 11 Define and/or explain each of the following terms and acronyms. Write in your own words, rather than trying to memorize what is in the textbook.

ItemItem TermTerm DefinitionDefinition

1 capital market

2 debt

3 bond

2020-11-10, 12:21 PMModule 4: International Monetary and Financial Systems

Page 7 of 13https://moodle.tru.ca/mod/book/tool/print/index.php?id=1072989

4 equity

5 stock

6 liquidity

7 international capital market

8 securitization

9 offshore financial centre

10 operational centre

11 booking centre

12 international bond market

13 eurobond

14 foreign bond

15 international equity market

16 eurocurrency market

17 interbank interest rates

18 foreign exchange market

19 exchange rate

20 currency hedging

21 arbitrage

22 currency speculation

23 spot markets (spot rates)

24 forward markets (forward rates)

25 options

26 futures

27 swaps

28 securities exchange

29 over-the-counter

30 countertrade

Download Lesson 11: Activities Checklist and Vocabulary

2020-11-10, 12:21 PMModule 4: International Monetary and Financial Systems

Page 8 of 13https://moodle.tru.ca/mod/book/tool/print/index.php?id=1072989

Learning Activities 11.1: International Capital Markets A capital marketcapital market is a system that allocates financial resources in the form of debt or equity. International capital marketsInternational capital markets bring the suppliers and borrowers of funds together, and provide an efficient mechanism for this exchange.

After a thorough study of the Lesson 11 resources and additional Internet and library research, respond to the following:

Distinguish between the terms debtdebt, bondbond, equityequity, and stockstock.

Discuss the main functions of international capital market, drivers of growth, financial centres, and offshore centres.

Discuss the international bond market, international equity market, and eurocurrency market, and their role in international business.

11.2: Foreign Exchange Market To convert one currency into another, international businesses use foreign exchange markets. Foreign exchange markets facilitate the buying and selling of currencies and also help in determining the prices of currencies. Rates depend on the value of transaction, economic conditions, and—in some cases—government policies.

After a thorough study of the Lesson 11 resources and additional Internet and library research, respond to the following:

1. Discuss the functions of the foreign exchange market.

2. Discuss how the foreign exchange market works, with an example.

3. Discuss in detail:

Spot marketsSpot markets (spot ratesspot rates)

Forward marketsForward markets (forward ratesforward rates)

OptionsOptions

FuturesFutures

SwapsSwaps

11.3: Present-Day Foreign Exchange Markets and Government Control Present-day foreign exchange markets are electronic networks that connect major financial centres. Financial centres are a network of foreign exchange trading firms, traders, banks, and financial institutions. Governments in most countries control foreign exchange with laws, rules, and regulations.

After a thorough study of the Lesson 11 resources and additional Internet and library research, respond to the following:

1. Discuss the composition of present-day foreign exchange markets and important currencies.

2. Discuss the three components of the foreign exchange market:

1. Interbank marketInterbank market

2. Securities exchangeSecurities exchange

3. Over-the-counter marketOver-the-counter market

2020-11-10, 12:21 PMModule 4: International Monetary and Financial Systems

Page 9 of 13https://moodle.tru.ca/mod/book/tool/print/index.php?id=1072989

3. What is currency convertibility? Give an example of a convertible currency and a nonconvertible currency.

4. Discuss why governments impose restrictions on currency conversion and policies used for restricting.

11.4: Reflective Journal — Topic for Lesson 11: International Financial Markets and Foreign Exchange Reflective Journal — Topic for Lesson 11: International Financial Markets and Foreign ExchangeReflective Journal — Topic for Lesson 11: International Financial Markets and Foreign Exchange The goal of government regulation of financial services industries is to maintain the integrity and stability of financial systems, thereby protecting both depositors and investors. Regulations include prohibitions against insider trading, against lending by management to itself or to closely related entities (called “self-dealing”), and against other transactions in which there is a conflict of interest.

Respond to the following in your journal and post to the discussion forum:

Will the recent increase in regulation will be effective in helping prevent another global financial meltdown?

Chapter 9 Practice Quiz Chapter 9 Practice QuizChapter 9 Practice Quiz Check your understanding of the vocabulary list items and basic concepts in the textbook reading before taking this quiz. If you have done the readings and answered the questions in the learning activities, then this online quiz should take approximately 5 to 10 minutes. You have 15 minutes in total to complete the quiz.

Assessments There are no assessments for this lesson.

Lesson 12: International Monetary Systems Overview International monetary systems establish rules on how countries decide the value of their currencies for exchange. The cost of converting foreign currency into a home country’s currency affects profitability. Countries whose currencies are valued low will experience the result in low prices of products and will benefit from an increase in exports, whereas countries whose currencies are valued high will experience a decrease in exports. Some countries intentionally lower their exchange rate to boost exports, while others maintain an artificially low exchange rate.

Countries use the law of one pricelaw of one price and purchase power parity in establishing exchange rates. Silver (coins) was used as media of exchange in trade in early civilizations, such as in India in seventh century BCE. Gold became the standard in Europe in the sixteenth century and continued to be the international standard until as late as 1939. This system was known as a fixed exchange ratefixed exchange rate system. The 1944 Bretton Woods AgreementBretton Woods Agreement linked the gold price to the US dollar and then tied the value of other currencies to that dollar. Thus, the US dollar became the vehicle currency for international trade. This agreement also established the World Bank and the International Monetary Fund (IMF) to regulate the foreign exchange system. The weakening of the US dollar led to the evolution of a flexible exchange rate system. International business and finance mangers now use the balance of payments, an accounting system used by countries to record and monitor their international transactions, to understand the stability of a country’s monetary system, and to use factors such as inflation and interest rates to predict fiscalfiscal and monetary monetary policiespolicies.

Lesson 12 will help you understand how international monetary systems work, the impact of a country’s balance of payments, and role of the IMF.

Learning Objectives

2020-11-10, 12:21 PMModule 4: International Monetary and Financial Systems

Page 10 of 13https://moodle.tru.ca/mod/book/tool/print/index.php?id=1072989

After you complete the work in Lesson 12, you should be able to:

Understand how exchange rates influence business outcomes.

Discuss the factors (law of one price and purchase power parity) used in determining exchange rates.

Understand the two ways of predicting future exchange rates.

Discuss the concept of a vehicle currency and the evolution of international monetary systems.

Discuss the fixed exchange rate systems (gold gold standardstandard and Bretton Woods Agreement) and floating exchange rate systems.

Discuss the role of the IMF.

Understand the importance of balance of payment.

Resources Here are the required resources for Lesson 12:

Textbook ReadingTextbook Reading Chapter 10: International Monetary System

Web-Based ResourcesWeb-Based Resources WTO at https://www.wto.org

IMF at https://www.imf.org/external/index.htm

Europa: Gateway to the European Union at https://europa.eu/european-union/index_en

EUbusiness at https://www.eubusiness.com/

UN at https://www.un.org/en/index.html

NAFTA at https://www.nafta-sec-alena.org

CUSMA (Canada–United States–Mexico Agreement) at https://international.gc.ca/trade-commerce/trade-agreements-accords- commerciaux/agr-acc/cusma-aceum/index.aspx?lang=eng

IMF News. (2015, December 1). IMF survey: Chinese renminbi to be included in IMF’s special drawing right basket. Retrieved from https://www.imf.org/en/News/Articles/2015/09/28/04/53/sonew120115a

IMF. (2019, February 2). A ‘delicate moment’ for the global economy, speech by IMF MD Christine Lagarde [Video file] Retrieved from https://www.imf.org/external/mmedia/view.aspx?vid=6022914760001

YouTube at https://www.youtube.com/ (contains a wealth of short videos on the IMF, many of which advocate political or country views, so judgment is needed in separating the principles from the positions)

Ndukwe, I. (2016, January 22). Falling naira prompts Nigerian currency controls [Video file]. Africa Business Report. Retrieved from https://www.bbc.com/news/av/business-35380549/falling-naira-prompts-nigerian-currency-controls

Checklist: Vocabulary, Learning Activities, and Assessments Done?Done? TaskTask

Vocabulary List: Lesson 12

2020-11-10, 12:21 PMModule 4: International Monetary and Financial Systems

Page 11 of 13https://moodle.tru.ca/mod/book/tool/print/index.php?id=1072989

12.1: Exchange Rates

12.2: Evolution of International Monetary Systems

12.3: Issues Connected with International Monetary System

Chapter 10 Practice Quiz

Assignment 4 (15%) (includes Journal Reflection 2)

Assignment 5 (25%)

Vocabulary List: Lesson 12 Define and/or explain each of the following terms and acronyms. Write in your own words, rather than trying to memorize what is in the textbook.

ItemItem TermTerm DefinitionDefinition

1 devaluation

2 revaluation

3 weak currency or soft currency

4 strong currency or hard currency

5 law of one price

6 nominal interest rate

7 Fisher effect

8 monetary policy

9 fiscal policy

10 International Fisher Effect (IFE)

11 business confidence survey

12 the gold standard

13 fixed exchange rate

14 Bretton Woods Agreement

15 International Monetary Fund

16 special drawing right

17 managed float system

18 free float system

2020-11-10, 12:21 PMModule 4: International Monetary and Financial Systems

Page 12 of 13https://moodle.tru.ca/mod/book/tool/print/index.php?id=1072989

19 currency board

20 World Bank

Download Lesson 12: Activities Checklist and Vocabulary

Learning Activities 12.1: Exchange Rates Exchange rates have a significant effect on the activities and performance of businesses. A weakweak home currencycurrency makes the products cheaper in international market and result in increase of exports. A strong strong currencycurrency, on the other hand, increases the price and dampens the demand.

After a thorough review of the Lesson 12 resources, respond to the following:

Discuss the effect of exchange rates on the activities of international business.

What do you understand by devaluation devaluation and revaluationrevaluation and their effects on international business?

Discuss in detail the two factors used in determining exchange rates: the law of one price (see Big Mac Index) and purchase power parity.

Discuss the theories used in forecasting exchange rates and the difficulties in forecasting.

12.2: Evolution of International Monetary Systems Modern international monetary systems evolved over many hundreds of years. The first system used was a fixed rate exchange system using gold known as the gold standard. This has undergone a number of changes and, currently, a floating exchange rate system is in operation.

After a thorough review of the Lesson 12 resources, respond to the following:

1. Discuss the gold standard exchange rate system and the reasons for discontinuing this system.

2. Discuss the Bretton Woods Agreement and the fixed system based on the US dollar as the vehicle currency.

3. What are the reasons for the collapse of this system?

4. Discuss the floating exchange rate systems (currency boardcurrency board, pegged arrangements).

12.3: Issues Connected with the International Monetary System The balance of payments of a country has an effect on value of the currency, exchange rate, and fiscal and monitory policies. The 1944 Bretton Woods Agreement established the International Monetary Fund (IMF) to supervise the international monetary system.

After a thorough review of the Lesson 12 resources, respond to the following:

1. What do you understand by the balance of payments?

2. Why is the balance of payments so important to international business?

3. Discuss the origin, role, and functions of the International Monetary Fund with special attention on special drawing special drawing rightsrights (SDRs).

4. Discuss, in brief, different financial crises across the world and their effect on international business.

2020-11-10, 12:21 PMModule 4: International Monetary and Financial Systems

Page 13 of 13https://moodle.tru.ca/mod/book/tool/print/index.php?id=1072989

Assessments Assignment 4: International Finance and Monetary System (15%)Assignment 4: International Finance and Monetary System (15%) Turn in Assignment 4, which includes Journal Reflection 2. In Assignment 4, you will compare how the international finance markets and monetary systems may impact on doing business in your finalist countries.

Assignment 5: Country Profile for International Business (25%)Assignment 5: Country Profile for International Business (25%) Turn in Assignment 5.