Introduction•The economies of the world have become increasingly interdependent.•Economic events in one country can have repercussion on the economies of other countries.
•International trade is a major part of today’s world economy. Why?•Countries trade with each others to obtain G&S they cannot produce themselves or because other nations can produce G&S at a lower cost.•There are various connections between the domestic economy with the rest of the world.
•Foreign countries supply G&S, labor & capital to M’sia and M’sia supplies G&S, labor & capital to the rest of the world.•When people in different countries buy from and sell to each other, an exchange of currencies must take place.•Therefore, the direction of trade between the two countries depends on exchange rates (ER).
What is ER?•ER – the price of one country’s currency in terms of the other country’s currency (ratio of two currency).•Example: (a) RM/US$ = 3.800(b) US$/RM = 0.2632
•Within a certain range of ER, trade flows in both directions, each countries specializes in producing the goods in which it enjoys a comparative advantage and trade is mutually beneficial.•Because ER is important in determining the flow of international trade, knowing the the way they are determined is also important.
The World Monetary System•The world monetary system has been changed several times by international aggrements and events.•Early in the century, nearly all currencies were backed by gold which determined their values in international trading.
•In 1944, with the international monetary system in chaos at the end of WWII, a group of experts unofficially representing 44 countries met in Bretton Woods, New Hampshire and drew up a number of agreements.•Among the agreements were the establishment of a system of fixed ER under which each county agreed to intervene by buying & selling currencies in the forex market when necessary to maintain the agreed-upon value of its currency.