1.
Macroeconomics and global financial management are two important topics that are
included in the field of international finance. It offers a thorough grasp of the ways in which
financial and commercial transactions take place between nations. The following are some
significant methods that international finance addresses these issues:
1. Foreign currency markets and exchange rates: The study of international finance
focuses on how foreign exchange markets operate and how exchange rates are set.
It investigates the effects of exchange rate fluctuations on international trade,
investment, and capital movements. grasp macroeconomic linkages and global
financial management require a grasp of this.
2. Balance of payments: An account of all economic exchanges between a nation and
the rest of the world, the balance of payments is examined in international finance.
It facilitates comprehension of a nation's trade balance, capital flows, and foreign
reserves, among other aspects of its global economic standing. For macroeconomic
analysis and policy-making, this data is essential.
3. International investment and trade: The study of international finance focuses on
the ideas and regulations pertaining to these areas. Topics including foreign direct
investment, trade restrictions, comparative advantage, and multinational firms are
all examined. Examining how globalization affects macroeconomics and international
financial management requires an understanding of these ideas.
4. International financial markets: International finance is the study of how the global
financial markets—which include the derivatives, equities, and bond markets—
operate. In these marketplaces, it examines the function of financial institutions like
banks and multinational companies. To comprehend the global financial system and
how it affects macroeconomic stability, one must be aware of this information.
5. International financial institutions and policies: The field of international finance
also looks at the policies and functions of international financial institutions like the
World Bank and the International Monetary Fund (IMF) in advancing the stability and
development of the world economy. It examines these organizations' rules and
policies and how they affect global financial management and macroeconomic
circumstances.
A thorough understanding of the relationship between macroeconomics and global
financial management is attained by individuals who study international finance. They
study the ways in which international organizations, financial markets, and economic
policies influence the world economy. Because it gives them the ability to handle the
complexity of the global financial scene, this information is essential for anyone
interested in finance, economics, or international business.
2.
The Bretton Woods system predominated as the global monetary system until the
establishment of the Mint Parity scheme. A UN Monetary and Financial Conference
conducted in July 1944 at Bretton Woods, New Hampshire, resulted in the
establishment of the Bretton Woods system. The basis for a new post-World War II
international monetary order was established during this meeting, which was attended
by representatives from 44 nations. John Maynard Keynes, the UK's delegate, advocated
the establishment of an international reserve asset known as bancor at Bretton Woods.
The US delegate made a contrasting suggestion. To be utilized as the currency for
settling international transactions was the new reserve asset that was to be developed.
In addition to facilitating bank loans among its members, the clearing union was
intended to supply liquidity. In order to get over their short-term balance of payment
issues, the US team under Harry Dexter White suggested creating a currency pool to
which participating nations would contribute and borrow money. The US
recommendations were generally included into the IMF accord's articles in the final
agreement. A fixed but flexible exchange rate mechanism was consequently suggested
and implemented. Furthermore, each of the participating nations promised to quickly
convert their currencies for use in current account transactions. The key components of
the Bretton Woods agreements' currency rate regime are listed below:
1. Without bringing back the traditional gold standard, the Bretton Woods system
sought to stabilize exchange rates.
2. The US dollar was the only currency that could be fully exchanged for gold from the
Federal Reserve, the country's central bank, under the terms of the "dollar-based
gold-exchange standard."
3. A US dollar was worth $35 an ounce of gold under the system. Unlike in the classical
gold standard, other currencies were not directly tied to gold.
4. Known as the par value relative to the USD, the currencies of other nations were
fixed to the US dollar.
5. It was the responsibility of each nation to purchase and sell local currency in order to
maintain its exchange rate within plus or minus one percent of par value.
6. As a means of making international payments, nations could maintain stockpiles of
both gold and US dollars.
In the years following World War II, the Bretton Woods system offered a reliable
substitute for the dominant international monetary framework.
3.a.
The notion of mercantilism is the most distinctive of the several theories of international
trade and finance. The predominant economic philosophy from the 16th to the 18th century
was mercantilism, which emphasized the acquisition of gold and silver as well as trade
surpluses as means of maximizing wealth. The focus on protectionism and the idea that a
nation's economic might is determined by its reserves of precious metals distinguish
mercantilism from other ideologies. To support exports and safeguard home industries,
mercantilists argued for laws imposing taxes, subsidies, and import limitations. Economic
success and national power, according to them, would result from a positive trade balance,
or when exports surpass imports. Some theories of international trade and finance,
including the traditional ideas of David Ricardo and Adam Smith, highlight the advantages of
specialization and free trade. This theory is different from these views. According to
traditional views, the best way to maximize global wellbeing is for nations to concentrate on
providing the goods and services in which they have a comparative advantage and to trade
freely. However, the hallmarks of mercantilism distinguish it as a unique ideology in the
domain of international commerce and finance: protectionism and the creation of wealth
via trade imbalances. Despite the fact that more contemporary views have mostly
supplanted mercantilism, the theory is nevertheless vital to study and comprehend due to
its historical significance and distinctive viewpoint.
3.b.
Foreign Currency Account: we can retain and conduct transactions in foreign currencies with a
foreign currency account. If we deal with foreign currencies on a regular basis, this is
essential since it can save us from exchange rate swings and currency conversion expenses.
