Quiz 8: The International Monetary System and Financial Forces

Business

There are various forces which exist to cause fluctuation in currency value. The fluctuation in currency has drastic impact on the financial transaction of a country. Rate of exchange fluctuation affects international trade. The exchange rate fluctuation determines whether it is beneficial to import or produce goods domestically. Mr. SS is the owner of Company SS. Company SS imports video equipment from Country JJ to sell in Country UU. The rate of exchange fluctuation over the past year has immense impact on the bottom line. In making the yearly report for the company, Mr. SS likes to include the one year currency chart showing the movement of dollar versus yen. Dollar is the currency of Country UU, and yen is the currency of Country JJ. The pattern which is noted is that there is considerable increase the value of dollar in comparison to yen. Hence it shows that dollar has gained ground over yen.

The Special Drawing Rights (SDR) is the international reserve asset which was established by the International Monetary Fund (IMF). The SDR is the unit of account for the IMF and also of other international organizations. The Development Bank of AA, which is a multilateral development bank owned by the sixty seven members primary aim is to reduce poverty. The bank makes its loan in Special Drawing Rights (SDR). The loans borrowed by people of different countries totaled to amount 44.3 billion dollars. The bank covers the exposure of the capital resources of 114.8 billion dollars by selling into the forward market the currency of SDR. The Development Bank of AA would hold Special Drawing Rights instead of dollars or euro due to the following reasons: The SDR is the reserve asset, which can make adjustments and avoid impending crisis The SDR is based on the basket of the four currencies like euro, yen, pound sterling and dollar The currency amount that makes up the SDR basket is the difference between the capital resources and the loan amount. This is the difference of 114.8 and 44.3 billion dollars, which is 70.5 billion dollars.

Gold was use as the standard form of exchange during the historical times due to its easily accessed purity level, exchange value, measure value and scarcity. The price of gold is increasing. The gold system refers to the gold being use as the standard for the units per currency. The advantages of the gold system are as follows: • The gold system is beneficial for its accessing purity level • The exchange value is more and so with one gold coin many things can be purchased • Gold coins can be easily distinguished • Gold system can be measured easily The disadvantages of the gold system are as follows: • Gold is a heavy metal which needs extra effort to carry • The transaction through gold system takes time • Gold coins create barriers during trade as large number of gold coins carrying was impractical • Gold coins storage and transportation costs had to be borne by traders in extra Hence, the above advantages and disadvantages are present in the gold system.