Chapter 31 econ -...

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View Full Document Right Arrow Icon CHAPTER 33 International Finance Chapter 32 presented the real side of international transactions, in that it concentrated on the flow of goods and services, essentially leaving money out of the process. In Chapter 33, we turn to the monetary side of international exchange where currencies are traded for one another in order to purchase foreign goods and service, to make overseas investments, and for speculative purposes. The chapter first discusses the balance of payments and what it does and does not tell us, then turns to the determination of exchange rates. This latter discussion is broken down into three sections: the theory of flexible exchange rates, the theory of fixed exchange rates, and the history of international monetary systems from the gold standard of the 1870s to the present system of managed flexible exchange rates. The chapter concludes with an assessment of the strengths and weaknesses of the current international monetary system. CHAPTER OBJECTIVES Upon completing this chapter, your students should be able to: 1. Explain the difference between a debit and a credit in the balance of payments. 2. Compute the current account balance. 3. Compute the balance of payments. 4. Explain how exchange rates are determined in a flexible exchange rate system. 5. Identify the causes of changes in exchange rates. 6. Explain the workings of a fixed exchange rate system. 7. Convert prices in one currency to prices in another currency. 8. Explain the purchasing power parity theory. KEY TERMS balance of payments • appreciation debit depreciation foreign exchange market • purchasing power parity (PPP) theory • credit fixed exchange rate system current account • overvaluation merchandise trade balance • undervaluation merchandise trade deficit • devaluation merchandise trade surplus • revaluation • current account balance • optimal currency area 58
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59 Chapter 33 capital account • International Monetary Fund (IMF) capital account balance • special drawing right (SDR) exchange rate • managed float flexible exchange rate system CHAPTER OUTLINE I.THE BALANCE OF PAYMENTS —Countries keep track of their level of domestic production by calculating their gross domestic product (GDP); similarly, they keep track of the flow of their international exchange (real and monetary) by calculating their balance of payments. The balance of payments is a periodic statement of the money value of all transactions between residents (and the government) of one country and residents (and governments) of all other countries. Balance of payments accounts record both debits and credits. Any transaction that involves an outlay of domestic currency (in exchange for foreign currency) is recorded as a debit . Any transaction that involves the receipt of foreign currency (in exchange for domestic currency) is recorded as a credit . Exhibit 1
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This note was uploaded on 09/22/2009 for the course BUSINESS Economics taught by Professor Richard during the Fall '08 term at Florida State College.

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Chapter 31 econ -...

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