Exchange Rates and the International Financial System


The’ twentieth century divides into two distinct periods. The period from 1914 .to 1945 was.characterized by destructive competition, shrinking international trade, growing financial isolation, hot and cold military and trade wars. despotism, and depression. After World War II, most of the world enjoyed growing economic cooperation, widening trade linkages, increasingly integrated financial markets, an expansion of democracy, and rapid economic growth.

The stark contrast between the first and second halves of this century IS a reminder of the high stakes in the wise management of out’ national and global economies. Economically, no nation is an island unto  itself. When the bell tolls depression or financial crisis, the sounds reverberate around the world . What are the economic links among nations? The important economic concepts involve international trade and finance. International trade in goods and services allows nations to raise their standards of living by specializing in areas of comparative advantage in production, exporting goods and services in which they are relatively efficient and importing those in which they are relatively inefficient. In a modern economy, trade takes place using different currencies. The international financial system plays an important role for it is the lubricant that facilitates exchange through  the buying and selling of commodities for dollars, Euros, and other currencies and of exchanging one currency for another.

International trade often seems a zero sum Darwinian conflict for market shares, profits’, and vital resources, A closer look rivers , however, that nations in the second half of the twentieth century evolved beyond the red-in-tooth-and-claw struggle-they built institutions that serve the common cause of growth and fairness in the international arena. But integration is not without its perils. The 1990s  saw a rapid succession of financial crises-s-a crisis of confidence in the exchange-rate regime in Europe in  1~91-1992. a collapse of the in 1994-: 199;). a series of banking and crises in East Asia in 1997. and a default 011 Russian debt and a global liquidity crisis in. 1998. Each of these required that consider the need for and hut in the (‘IHI none led to widespread economic collapse. The next two chapters international macroeconomics. This topic includes the principles governing the international monetary system, . which is the major focus of the present chapter, as well as the impact of foreign trade on output, employment. and prices, which is covered in the next chapter.

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