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Unit Five Money Systems

Unit Five Money Systems. Unit 6 Vocabulary. Floating Exchange Rate Hard Currency Interest Rate International Money Fund (IMF) Insurance Certificate Letter of Credit Money Promissory Note Soft Currency Trade Credit World Bank. Account Receivable Bill of Exchange Bond Capital Project

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Unit Five Money Systems

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  1. Unit FiveMoney Systems

  2. Unit 6 Vocabulary • Floating Exchange Rate • Hard Currency • Interest Rate • International Money Fund (IMF) • Insurance Certificate • Letter of Credit • Money • Promissory Note • Soft Currency • Trade Credit • World Bank • Account Receivable • Bill of Exchange • Bond • Capital Project • Commercial Invoice • Credit Terms • Currency Future • Electronic Funds Transfer (EFT) • Exchange Controls • Exchange Rate • Foreign Exchange • Foreign Exchange Market

  3. Unit 6 Essential Question • How is money used and exchanged in international business?

  4. Essential Question 1Money SystemsWhat is a money system and why is it used? Amplifying Questions What is the role of money and currency systems in international business? What factors affect the value of currency? International Business pg. 174-179

  5. Money and Currency Systems What is money? • Acceptability • Scarcity • Durability • Divisibility • Portability VS.

  6. Money and Currency Systems Why is money used? • Medium of exchange • Measure of value • Store of value

  7. Gold Standard • Shift from “farm” standard to “gold” standard occurred around 1200 AD. • Gold Standard:An agreed value of gold per ounce.

  8. Gold Standard - History • On December 22, 1717, Sir Issac Newton, master of the mint, established the price of gold at 3 pounds, 17 shillings, 10.5 pence per ounce. • Due to the financial burdens of World War I many countries were forced to pay their debts in gold. Rather than diminishing their gold reserves, the countries dropped the gold standard.

  9. Gold Standard - History • Bretton Woods Conference • Held in 1945 in Bretton Woods, New Hampshire. • Established the International Monetary Fund (IMF). • Established the gold exchange standard - one ounce of gold would be worth US$35.

  10. Gold Standard - History • From 1958 to 1971 the U.S. fiscal policy ran up a deficit balance of payment to the point where each US$ in circulation was backed by only $0.22 of gold. • In August, 1971 Britain requested the U.S. pay its debt, US$8 Billion, in gold. • To prevent U.S. bankruptcy, President Nixon ordered the U.S. off the gold exchange standard.

  11. Foreign Exchange • Balance of payments - Flow of money • Economic conditions • Money supply and demand • Risk • Inflation • Political Stability

  12. Essential Question 2Money SystemsHow is currency exchanged? Amplifying Questions How do you calculate exchange rates? How is foreign currency manipulation controlled? What are the functions of the World Bank and the International Monetary Fund? International Business pg. 181-185

  13. Foreign Exchange Activities • Changing exchange rates • Soft Currency • Hard Currency • Floating Exchange Rate • http://www.econedlink.org/lessons/index.cfm?lesson=EM342 • Cash, Traveler’s Check, or Credit Card?

  14. Foreign Exchange Activities • Exchange Rate Calculations • Step 1: Setup a ratio. • Step 2: Solve for the missing variable. • Examples: • How many British Pounds will fifty-five US dollars buy when US$1.56419 buys GB£1.00? • How many Japanese Yen will twenty British Pounds buy when GB£0.639309 and J¥120.230 buys US$1.00?

  15. Foreign Exchange Activities • The foreign exchange market • http://www.xe.com/ict/table.cgi • http://www.bloomberg.com/invest/calculators/currency.html • Foreign exchange controls

  16. International Financial Agencies • The World Bank • International Bank for Reconstruction and Development (IBRD) • Sub-organization of the UN • Provides economic assistance to less developed nations through the: • International Development Association (IDA) – Provides low interest long term (50 years) loans to developing countries. • International Finance Corporation (IFC) – Provides capital and technical assistance to private businesses in nations with limited resources.

  17. International Financial Agencies • The International Monetary Fund (IMF) • Sub-organization of the UN • Promotes economic cooperation and maintains an orderly system of world trade and exchange rates by: • Analyzing economic situations – monitors a country’s trade, borrowing and government spending. • Suggesting economic policies to encourage global trade. • Providing low interest loans to countries with high foreign debt to avoid escalating trade deficits and currency devaluation.

  18. Essential Question 3Money SystemsHow is currency transactions handled between countries? Amplifying Questions What are the types of payments used for international business transactions? How are letters of credit used in international transactions? International Business pg. 187-192

  19. International Financial Transactions • Foreign trade payment methods • Cash in advance – Pay before goods received • Letter of credit – Document issued by a bank • Sale on account - Credit • Sources of international financing • Short-term financing – Less than a year • Long-term financing – Greater than a year

  20. Other Payment Methods and Financial Documents • Promissory note • Bill of exchange • Electronic funds transfer (EFT) • Commercial invoice • Insurance certificate

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