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Final Exam Study Guide (New Book)

Chapter 6
Absolute advantage principle- A country should produce only those products in
which it has absolute advantage or can produce using fewer resources than
another country
Comparative advantage principle-The foundation concept of international trade,
which answers the question of how nations can achieve and sustain economic
success and prosperity. It refers to the superior features of a country that provide it
with unique benefits in global competition. Comparative advantages are derived
either from natural endowments or from deliberate national policies.
Competitive advantage- A foundation concept that explains how individual firms
gain and maintain distinctive competencies, relative to competitors, that lead to
superior performance. It refers to the distinctive assets, competencies, and
capabilities that are developed or acquired by the firm.The collective competitive
advantages held by the firms in a nation are the basis for the competitive
advantages of the nation at large.
Mercantilism- A belief popular in the 16th century that national prosperity results
from maximizing exports and minimizing imports. (neo-merchantilism- trade
surplus=saves domestic jobs).
Theories of International Trade and Investment Nation level explanationso Diamond Model= Factor Conditions (quality) -> Related and Supported
Industries (presence of supplier/competitors/firms) -> Demand Conditions
at Home (Strengths of customer demand) -> Firm strategy, structure, and
rivalry (firms created/organized/managed)
o New Trade Theory= Argues that economies of scale are an important
factor in some industries for superior international performance, even in
the absence superior comparative advantages. Some industries succeed
best as their volume of production increases.
o Factor Proportion Theory= Also known as Factor Endowments Theory. It
argues that each country should produce and export products that
intensively use relatively abundant factors of production, and import
goods that intensively use relatively scarce factors of production
o International Product Life Cycle Theory= Each product and its associated
manufacturing technologies go through three stages of evolution:
introduction (monopoly), maturity(standardize), and standardization(cease
original innovator).
o National Industrial Policy= A proactive economic development plan
employed by the government to nurture or support promising industry
sectors with potential for regional or global dominance. (incentives).

Theories of International Trade and Investment Firm level explanationso Internationalization= Domestic Focus -> Pre-export Stage -> Experimental
Involvement -> Active Involvement -> Committed Involvement

o Monopolistic Advantage= Argues that MNEs prefer FDI because it


provides the firm with control over resources and capabilities in the
foreign market, and a degree of monopoly power relative to foreign
competitors. Key sources of monopolistic advantage include proprietary
knowledge, patents, unique know-how, and sole ownership of other assets
o Dunnings Eclectic Paradigm= If company will enter country via FDI:
Ownership-Specific Advantage- Knowledge/skills/relationships
Locations-Specific Advantage- Natural resource/low cost labor
Internationalization Advantage- control derives through
manufacturing/distribution/etc
o International Collaborative Venture= A form of cooperation between two
or more firms. Partners pool resources and capabilities to create synergies,
and share the risk of joint efforts.
Equity-based joint ventures= result in the formation of a new legal
entity. In contrast to the wholly-owned FDI, the firm collaborates
with local partner(s) to reduce risk and commitment of capital.
Project-based alliances= do not require equity commitment from
the partners but simply a willingness to cooperate in R&D,
manufacturing, design, or any other value-adding activity. Since
project-based alliances have a narrowly defined scope of activities
and timeline, they provide greater flexibility to the firm than
equity-based ventures
Chapter 7
What is country risk? Exposure to potential loss or adverse effects on company
operations and profitability caused by developments in a countrys political and/or
legal environments.
Political Systems
o Define totalitarianism- Government controls all economic and political
matters (dictator)
o Define socialism- Capital is vested in the state and used primarily as
a means of production for use rather than for profit. (control production
etc, income tax rate are high, group welfare outweighs indiv.)
o Define democracy- Limited government: The government performs only
essential functions that serve all citizens, such as national defense,
maintaining law & order, foreign relations, and providing basic
infrastructure. Private property rights: The ability to own property and
assets and to increase ones asset base by accumulating private wealth.
Property includes land, buildings, stocks, contracts, patents. Encourages
initiative, ambition, innovation.
o How political systems influence economic systems
Define command economy- The state makes all decisions on what
to produce, how much to produce, and what prices to charge.
(Totalitarian).

Define market economy (capitalism)- Decisions are largely left to


market forces, that is, supply and demand. (Democracy).
Define mixed economy- features of both market and command
economies, combining state intervention and market mechanism
(Socialism).

Legal Systems
o Define Common Law- A legal system that originated in England and
spread to Australia, Canada, USA, and other former members of the
British Commonwealth (also known as case law). The basis of law is
tradition, past practices, and legal precedents set by courts via
interpretation of statutes, legislation, and past rulings. Judges have much
power to interpret laws based on the circumstances of individual cases.
Thus, common law is relatively flexible. (judicial court law)
o Define Civil Law- Found in France, Germany, Italy, Japan, Turkey, and
much of Latin America. Based on an all-inclusive system of laws that have
been codifiedclearly written by legislative bodies. Laws are more
cast in stone and not strongly subject to interpretation by courts.(national
and state legisatures)
o Define Religious (Theocratic) Law- Strongly influenced by religious
beliefs, ethical codes, and moral values, viewed as mandated by a supreme
being. Most important religious legal systems are based on Hindu, Jewish,
and Islamic law. Islamic law spells out norms of behavior regarding
politics, economics, banking, contracts, marriage,
and many other social and business issues.
o Define Socialism Lawo Mixed Systems- Two or more legal systems operating together. The
contrast between civil and common law has become blurred as countries
combine both systems. Totalitarianism is most associated with religious
law and socialist law. Democracy is associated with common law, civil
law, and mixed systems.
Actors in Political and Legal Systems
o Government- or the public sector, operating
at national and local levels.
o International Organizations-such as the World Bank, World Trade
Organization, and the United Nations
o Regional Economic Blocs- such as the European Union, NAFTA, and
many others.
o Special Interest Groups- such as labor unions and environmental
advocates
o Competing Firms- which oppose foreign firms.
Types of Country Risk Produced by the Political System
o Government takeover of Corporate Assets- Confiscation: Seizure of
corporate assets without compensation. Expropriation: Asset seizure with
compensation. Nationalization: Takeover of an entire industry, with or
without compensation.

o Embargoes and Sanctions- Embargoes are bans on exports or imports that


forbid trade in specific goods with specific countries. Example: The U.S.
has enforced embargoes against Cuba, Iran, and North Korea, labeled as
state sponsors of terrorism. Sanctions are bans on international trade,
usually undertaken by a country, or a group of countries, against another
judged to have jeopardized peace and security.
o Boycotts against Firms or Nations- Voluntary refusal to engage in
commercial dealings with a nation or a company
o War, Insurrection, and Revolution- Indirect effects can be disastrous for
company activities.
o Terrorism- the threat or actual use of force or violence to attain a political
goal through fear and intimidation.
Types of Country Risk Produced by the Legal System
o Country risk arising from the host country legal environment Foreign investment laws- affect FDI-based entry.
Controls on operating forms and practices- laws and regulations on
how firms can conduct production, marketing, and distribution
activities.
Marketing and distribution laws- regulate practices in advertising,
promotion, and distribution.
Laws regarding income repatriation- limit the amount of net
income or dividends that firms can bring back to the home country.
Environmental laws- aim to preserve natural resources, combat
pollution, and ensure safety.
Contract laws- affect the sale of goods and services; intermediary
agreements; licensing and franchising; foreign direct investment;
and joint ventures.
Internet and e-commerce regulationso Country risk arising from the home country legal environment
Define extraterritoriality- the application of home-country laws to
other countries. For example, the European Union pursued
Microsoft for monopolistic practices
The Foreign Corrupt Practices Act- made it illegal to offer bribes
to foreign parties. But the act may harm U.S. firms because foreign
competitors are usually not so constrained.
Antiboycott regulations Accounting and reporting laws- Physical asset valuations: Canada
and the U.S. use historical costs. Some Latin American countries
use inflation-adjusted market value. R&D costs: expensed as
incurred in most of the world; Capitalized in South Korea and
Spain. Some countries use both conventions.
Define transparency- is the degree to which firms regularly reveal
substantial financial and accounting information. Varies
worldwide.
Ethical values and practices

Managing Country Risk


o Proactive Environmental Scanning- Management should develop a
comprehensive understanding of the political and legal environment in
target countries. Scanning ongoing assessment of potential risks and
threats to the firm.
o Strict Adherence to Ethical Standards- Firms that engage in questionable
practices or operate outside the law invite redress from the governments of
the host countries where they do business
o Define Corporate Social Responsibilityo Allying with Qualified Local Partners
o Protection through Legal Contracts- Conciliation is a formal process of
negotiation whose objective is to resolve differences in a friendly manner.
It is the least adversarial method. Common in China. In arbitration, a
neutral third party hears both sides of a case and decides in favor of one
party or the other, based on an objective assessment of the facts. Litigation
occurs when one party files a lawsuit against another. The most adversarial
approach, it is common in the United States.
o Safeguarding Intellectual Property Rights

Chapter 8

Government Intervention in International Business


o Define protectionism- national economic policies that restrict free trade.
Usually intended to raise revenue or protect domestic industries from
foreign competition.
o Define tariffs- a tax on imports (e.g., citrus, textiles)
o Define Nontariff trade barrier- government policy, regulation, or procedure
that impedes trade
o Define customs- the checkpoint at national ports of entry where officials
inspect imported goods and levy tariffs.
o Define quota- quantitative restriction on imports of a specific product
(e.g., imports of Japanese cars)
Rationale for Government Intervention
o Defensive Rationale- Protection of the national economy weak or young
economies sometimes need protection from foreign competitors. E.g.,
India imposed barriers to shield its huge agricultural sector, which
employs millions. Protection of an infant industry a young industry may
need protection, to give it a chance to grow and succeed. E.g., Japan long
protected its car industry. National security the United States prohibits
exports of plutonium and similar products to North Korea. National
culture and identity Canada restricts foreign investment in its movie and
TV industries.
Define export control
o Offensive Rationale- National strategic priorities protection helps
ensure the development of industries that bolster the nations economy.

Countries create better jobs and higher tax revenues when they support
high value-adding industries, such as IT, automotive, pharmaceuticals, or
financial services. Increase employment protection helps preserve
domestic jobs, at least in the short term. However, protected industries
become less competitive over time, especially in global markets, leading
to job loss in the long run.
Instruments of Government Intervention
o Know the different kinds of tariffs
o Define Import license- Government authorization granted to a firm
for importing a product.
o Define currency control- Restrictions on the outflow of hard currency
from a country or the inflow of foreign currencies.
o Define subsidies- are government grants (monetary or other resources) to
firm(s), intended to ensure their survival or success by facilitating
production at reduced prices, or encouraging exports.
o Define countervailing duty- Tariff imposed on products imported into
a country to offset subsidies given to producers or exporters in the
exporting country.
o Define dumping- Pricing exported products at less than their normal
value, generally less than their price in the domestic or thirdcountry markets, or at less than production costs.
o Define antidumping duty- A tax imposed on products deemed to be
dumped and causing injury to producers of competing products in
the importing country.
o Define investment incentive- Transfer payment or tax concession
made directly to foreign firms to entice them to invest in the
country.
Government Intervention, Economic Freedom, and Ethical Concerns- Economic
freedom is the absence of government coercion so that people can work, produce,
consume, and invest however they want to.
Evolution of Government Intervention- Protectionist tendencies, the Great
Depression, and isolationism shaped early 20th century world trade. The SmootHawley Act (1938) raised U.S. tariffs to more than 50% (compared to only 3%
today). Progressive trade policies reduced tariffs after WWII. In 1947, 23 nations
signed the General Agreement on Tariffs and Trade (GATT). The GATT: reduced
tariffs via continuous worldwide trade negotiations; created an agency to
supervise world trade; and created a forum for resolving trade disputes.
How Firms Should Respond to Government Intervention- Research to gather
knowledge and intelligence. Understand trade and investment barriers abroad.
Scan the business environment to identify the nature of government intervention.
Choose the most appropriate entry strategies. Most firms choose exporting as
their initial strategy, but if high tariffs are present, other strategies should be
considered, such as licensing, or FDI and JVs that allow the firm to produce
directly in the market.
o Strategies for Managers-

o Define foreign trade zone- FTZs are areas where imports receive
preferential tariff treatment, intended to stimulate local economic
development
o Define maquiladoras-export-assembly plants in northern Mexico.
Chapter 9

Regional Integration and Economic Blocs


o Define Regional economic integration- The growing economic
interdependence that results when nations within a geographic region form
an alliance aimed at reducing barriers to trade and investment
o Define Regional economic integration bloc- A geographic area
consisting of two or more countries that have agreed to pursue
economic integration by reducing barriers to the cross-border flow
of products, services, capital, and labor.
o Define free trade agreement- A formal arrangement between two or
more countries to reduce or eliminate tariffs, quotas, and barriers to
trade in products and services.
Types of Regional Integration
o Define Free trade area- A stage of regional integration in which
member countries agree to eliminate tariffs and other barriers to
trade in products and services within the bloc.
o Define Customs union- A stage of regional integration in which the
member countries agree to adopt common tariff and nontariff
barriers on imports from nonmember countries.
o Define Common market- A stage of regional integration in which
trade barriers are reduced or removed. Common external barriers
are established. And products, services, and factors of production
are allowed to move freely among the member countries.
o Define Economic Union- A stage of regional integration in which
member countries enjoy all the advantages of early stages but also
strive to have common fiscal and monetary policies.
Leading Economic Blocs
o The European Union- 27 members. Founders members are Belgium,
Italy France, Germany, Luxembourg, and the Netherlands. New
members such as Poland, Hungary, Czech Republic are low-cost
manufacturing sites. Peugeot, Citron (France) factories in Czech
Republic/Hyundai (South Korea) Kia plant in Slovakia/Suzuki
(Japan) factory in Hungary. Most new EU entrants are in Eastern
Europe one-time satellites of the Soviet Union, most are
emerging markets with fast economic growth rates.
o European Free Trade Association (EFTA)o North American Free Trade Agreement (NAFTA)- Passage of NAFTA in
1994 was facilitated by the maquiladora program, thru which U.S. firms
located factories just south of the U.S. border to access low-cost labor

without significant tariffs. NAFTA: Eliminated tariffs and most nontariff


barriers for products and services. Established trade and investment rules,
uniform customs procedures, and intellectual property rights Provided
procedures for settling trade disputes
o El Mercado Comun del Sur (MERCOSUR)- The leading economic bloc in
South America, accounting for nearly all of the regions GDP Launched in
1991, the four initial members were Argentina, Brazil, Paraguay, and
Uruguay. Established free movement of products and services, common
external tariff and trade policy, and coordinated monetary and fiscal
policies. May be integrated with NAFTA and DR-CAFTA as part of a
future Free Trade Area of the Americas.
o The Caribbean Community (CARICOM)o Comunidad Andina de Naciones (CAN)
o Association of Southeast Asian Nations (ASEAN)
o Asia Pacific Economic Cooperation (APEC)
o Australia and New Zealand Closer Economic Relations Agreement (CER)
o Economic Integration in the Middle East and Africa
Why Countries Pursue Regional Integration- Expand market size Increases size
of the marketplace for firms inside the economic bloc. Belgium has a population
of just 10 million; the EU has a population of nearly 500m Buyers can access
larger selection of goods Enhance productivity and economies of scaleBigger
market facilitates economies of scale. Internationalization inside the bloc helps
firms learn to compete outside the bloc. Competition and efficient resource usage
inside the bloc leads to lower prices for bloc consumers. Attract investment from
outside the blocCompared to investing in stand-alone countries,foreign firms
prefer to invest in countries belonging to an economic bloc. General Mills,
Samsung, and Tata have invested heavily in EU-member countries. Acquire
stronger defensive and political posture Belonging to a bloc provides member
countries with a stronger defensive posture relative to other nations and world
regions. This was a key motive for formation of the European Union.
Success Factors for Regional Integration- Economic similarity. Strong similarity
on wage rates, economic conditions, and other factors helps ensure success. Most
EU countries are similar in this way. Political similarity. Countries should have
similar political systems, share aspirations, and be willing to surrender national
autonomy. This is a key success factor of the EU. Similarity of culture and
language. MERCOSUR and Australia/New Zealand CER are similar in this way.
Geographic proximity. Facilitates intra-bloc movement of products, labor, and
other factors. Often, neighboring countries share a common history, culture and
language.
Drawbacks and Ethical Dilemmas of Regional Integration- Trade creation As
barriers fall, trade is generated inside the bloc. Trade diversion As within-bloc
trade becomes more attractive, member countries discontinue some trade with
nonmember countries. Aggregate effect National trade patterns are altered.
More trade occurs inside bloc; less trade occurs with countries outside the bloc. A
bloc can become an economic fortress leading to more within-bloc trade and less
between-bloc trade, which can reduce global free trade. Loss of national identity.

Increased cross-border contact makes members more similar to each other. In


response to NAFTA, Canada has restricted the ability of U.S. movie and TV
producers to invest in the Canadian film and broadcasting industries. Sacrifice of
autonomy. In later stages, a central authority is set up to manage the blocs
affairs. Members must sacrifice some autonomy to the central authority, such as
control over their own economy. E.g., Britain in the EU. Transfer of power to
advantaged firms. Integration can concentrate economic power in the hands of
fewer, larger firms, often in the most advantaged member countries. Failure of
small or weak firms. As barriers fall, protections are eliminated that previously
shielded smaller or weaker firms from foreign competition. Corporate
restructuring and job loss Restructuring and increased competitive pressures
may lead to layoffs or re-assigning employees to distant locations, disrupting
workers and entire communities.
Management Implications of Regional Integration- Internationalization by
firms inside the economic bloc. Regional integration facilitates company
internationalization. Rationalization of operations. By restructuring an
consolidating company operations, managers can develop strategies and valuechain activities suited to the region as a whole, not just individual countries. Goal
is to cut costs and redundancy, and increase efficiencies via scale economies.
Firms centralize production and marketing, instead of decentralizing them to
individual countries. Mergers and acquisitions. Economic blocs lead to M&A,
the tendency of one firm to buy another, or of two or more firms to merge and
form a larger firm. Regional products and marketing strategy. Firms cut costs
by standardizing products and services. Case Inc. reduced its Magnum line of
tractors from 17 to only a few versions in Europe, following integration of the
EU. Internationalization by firms from outside the bloc. Because external
trade barriers mainly affect exporting, many foreign firms prefer to enter a bloc
through FDI. In this way, after formation of the EU, Britain became the largest
recipient of FDI from the United States.
Chapter 10

The Distinction between Advanced Economies, Developing Economies, and


Emerging Markets
o Define Advanced economies- Post-industrial countries characterized by
high per capita income, competitive industries, and developed commercial
infrastructure. E.g., worlds richest countries, including Australia, Canada,
Japan, United States, and the nations of Western Europe.
o Define Developing economies- Low-income countries characterized by
limited industrialization and stagnant economies. E.g. Bangladesh,
Nicaragua, Zaire.
o Define Emerging economies- A subset of former developing economies
that have achieved substantial industrialization, modernization, and
remarkable economic growth. E.g., Indonesia, Mexico, Poland, Turkey.
o Define Transition economies- A subset of emerging markets that
evolved from centrally planned economies into liberalized markets.

o Define Privatization- Transfer of state-owned industries to private


concerns.
What Makes Emerging Markets Attractive for International Business
o Emerging Markets as Target Markets- Many have huge middle classes,
with significant income for buying electronics, cars, health care services,
and countless other products. Many exhibit high economic growth rates.
o Emerging Markets as Manufacturing Bases- Home to low-wage, highquality labor for manufacturing and assembly operations. Large reserves
of raw materials and natural resources. E.g., South Africa, Brazil, Russia.
o Emerging markets as Sourcing Destinations- MNEs have established
numerous call centers in Eastern Europe, India, the Philippines, and
elsewhere. Dell and IBM outsource certain technological functions to
knowledge workers in India. Intel and Microsoft have much of their
programming activities performed in Bangalore, India. Investments from
abroad benefit emerging markets as they lead to new jobs and production
capacity, transfer of technology and linkages to the global marketplace
o Define Outsourcing- The procurement of selected value-adding
activies including production of intermediate goods or finished
products from independent suppliers.
o Define Global sourcing- The procurement of products or services
from independent suppliers or company-owned subsidiaries located
abroad for consumption in the home country or a third country.
Estimating the True Potential of Emerging Markets
o Per-capita Income as an Indicator of Market Potential- PPP adjusted per
capita GDP represents the amount of products that consumers can buy in a
given country, using their own currency and consistent with their own
standard of living.
o Middle Class as an Indicator of Market Potentialo Use of a Comprehensive Index to Measure Market Potential
Risks and Challenges of Doing Business in Emerging Markets
o Political Instability- corruption, weak legal systems, and unreliable
government authorities increase business risks and costs, and hinder
forecasting.
o Weak Intellectual Property Protection- discourages producing or selling
goods that entail valuable assets.
o Bureaucracy, Red Tape, and Lack of Transparency- burdensome rules,
excessive requirements for licenses, approvals, and paperwork; not
accountable legal and political systems. E.g., it may take years, or many
bribes, to obtain permissions to do business. China, India, and Russia are
particularly problematic
o Partner Availability and Qualifications- given emerging market challenges,
foreign firms may seek local partners, who provide access to markets,
supplier and distributor networks, and key government contacts. But
qualified partners are often hard to find, or require much assistance to
upgrade their abilities.

o Dominance of Family Conglomerates- economies are often dominated by


privately-owned local companies that are highly diversified, and control
supplies and employment. Common in South Korea (chaebols), India
(business houses), Latin America (grupos), and Turkey (holding
companies).
Strategies for Doing Business in Emerging Markets
o Partnering with family conglomerates- A large highly diversified
company that is privately owned.
o Marketing to Governments in Emerging Markets-which buy enormous
quantities of products, such as computers, furniture, office supplies, and
motor vehicles, as well as services. State enterprises operate in areas such
as railways, airlines, banking, oil, chemicals and steel.
o Define tenders- Formal offers made by a buyer to purchase certain
products or services
o Skillfully challenge emerging market competitors- Low-cost labor, skilled
workforce, government support, and family conglomerates give emerging
market firms various advantages. Advanced economy firms must:
Conduct research to understand target markets and the indigenous
challengers;Acquire new capabilities that build competitive advantage
(e.g., develop new products, new ways of doing business, local alliances)
Leverage the same advantages in emerging markets enjoyed by local firms
(e.g., low-cost labor, skilled workforce, cheap capital, key partnerships).
Catering to Economic Development Needs of Emerging Markets and Developing
Economies
o Fostering Economic Development with Profitable Projects- Increasingly,
firms are involved in fostering economic development in emerging
markets. Assisting economic development may (or may not) be part of
efforts aimed at corporate social responsibility. More commonly, doing
business in emerging markets makes good business sense, and generates
big profits.Helpful ventures include modernization projects (e.g., power
plants); infrastructure projects (highways); injections of capital (via
microfinance); marketing consumer products (which leads to distribution
channels, reduces prices, and creates jobs).
o Microfinance to facilitate Entrepreneurship- Wal-Mart and Home Depot
have created new, cost-effective distribution channels in Mexico Unilever
and P&G sell shampoo in India for less than $0.02 per mini-sachet. Cemex
provides low-cost building materials to millions of poor people. Narayana
Hrudayalaya sells health insurance for less than $0.20 per person per
month in India. Various cell-phone and telecom firms have substantially

Chapter 11

Currencies and Exchange Rates in International Business


o Define currency risk

o Define Exchange rate- The price of one currency expressed in terms


of another.Currency risk,Potential harm that arises from changes in
the price of one currency relative to another.
o Convertible and Nonconvertible Currencies- Most currencies are not very
convertible. The dollar, yen, pound, euro are hard currencies
universally accepted and preferred in international transactions
o Foreign Exchange Markets
o Define Foreign Exchange- All forms of money that are traded
internationally. This includes foreign currencies, bank deposits,
checks, and electronic transfers.
o Define Foreign exchange market- The global marketplace for buying
and selling national currencies.
o Exchange Rates are in constant flux- currency rate change
How Exchange Rates are Determined
o Economic Growth- is the increase in value of the goods and services
produced by an economy.
o Interest Rates and Inflation
o Define Central Bank- The monetary authority in each nation that
regulates the money supply and credit. It issues currency and also
manages the exchange rate of the nation's currency.
o Market Psychology- refers to investor behavior, such as herding behavior
or momentum trading.
o Government Action- governments intervene to influence the value of their
own currencies, e.g., the Chinese government regularly intervenes in the
foreign exchange market to keep the renminbi undervalued, to help ensure
exports.
o Define Trade Surplus- A condition in which a nation's exports exceed
its imports for a period of time.
o Define Trade deficit- A condition in which a nation's imports exceed
its exports for a period of time.
o Define Devaluation- Government action to reduce the official value of
its currency, relative to other currencies.
o Define Balance of payments- The annual accounting of all economic
transactions of a nation with ALL other nations.
Development of the Modern Exchange Rate System
o Define IMF- An international agency that aims to stabilize
currencies by monitoring the foreign exchange systems of member
countries and lending money to developing economies.
o Define World Bank- An int. agency that provides loans and technical
assistance to low and mid-income countries with the goal of
reducing poverty.
o The Exchange Rate System today
The International Monetary and Financial Systems

o Define International Monetary System- Institutional framework, rules,


and procedures by which national currencies are exchange for one
another.
o Define Global financial system- The collective of financial institutions
that facilitate and regulate investment and capital flow worldwide.
These include central banks, commercial banks, and national stock
exchanges.
o Define Contagion- the crisis spread quickly to Europe and beyond.
Key Players in the Monetary and Financial Systems
o The Firm- International transactions require firms to deal with huge sums
of foreign exchange.
o National Stock Exchanges and Bond Markets- Facilities for trading
securities and bonds.
o Commercial Banks- Lend money to finance business activity, play a key
role in nations money supplies, and exchange foreign currencies.
o Central Banks- Regulate money supply, issue currency, manage exchange
rates, control national reserves.
o Define Monetary Intervention- The buying and selling of currencies by
a central bank to maintain the exchange rate of a country's currency
at some acceptable level.
o The Bank for International Settlements- Supervises Central Bank
monetary policy and other activities
o IMF- Agency that promotes exchange rate stability, monitors exchange
systems provides funding to developing economies.
o Define Special Drawing Right- A unit of account or reserve asset...a
type of currency used by central banks to supplement their existing
reserves in transactions with the IMF.
o World Bank- Agency that provides loans and technical assistance to
combat global poverty around the world.