Lecture: Foreign Exchange Market and Monetary System

Introduction

• Presenter: Lon Schiffbauer
• Topic: Foreign exchange market and monetary system
• Part of a series on international business

Functions of a Foreign Exchange Market

• Facilitates currency conversion
• Provides insurance against foreign exchange risk

Types of Exchange Rates

Fixed Exchange Rate

• Government sets and manipulates currency value
• Generally illegal except in rare cases

Floating Exchange Rate

• Currency value determined by market forces
• Most countries use this system

Impact of Exchange Rates on Business

• Exchange rates can affect profit margins in international business
• Example: U.S. company selling in England

Understanding Strong and Weak Currencies

• Strong Currency
  • Good for importers/customers
  • Bad for exporters
• Weak Currency
  • Bad for importers/customers
  • Good for exporters

Exchange Controls

• Limitations imposed by governments on currency purchase/sale
• Used by countries with transitional economies
• Example: China

Economic Comparisons: GDP and PPP

Gross Domestic Product (GDP)

• Total value of goods/services produced within a country

Purchase Power Parity (PPP)

• Compares cost/value of a basket of goods across countries
• Aims to reflect standard of living more accurately than GDP

International Monetary Systems

International Monetary Fund (IMF)

• Stabilizes global monetary systems
• Provides loans to troubled economies

World Bank

• Provides financial assistance to developing nations
• Aim: Economic advancement and poverty reduction

World Trade Organization (WTO)

• Regulates international trade
• Sets and enforces trade rules
• Mediates disputes and can impose sanctions

Example: Boeing vs. Airbus

• Ongoing trade dispute involving government subsidies

Conclusion

• Completion of 12-module series on international business
• Additional resources available on business topics