BALANCE OF PAYMENTS AND INTERNATIONAL MONETARY SYSTEM

Abstract

This chapter discusses two closely related topics in international finance: the balance of payments and the international monetary system. A country’s balance of payments is commonly defined as the record of transactions between its residents and foreign residents over a specified period. These transactions include exports and imports of goods and services, cash receipts and payments, gifts, loans, and investments. Residents may include business firms, individuals, and government agencies. The balance of payments helps business managers and government officials to analyze a country’s competitive position and to forecast the direction of pressure on exchange rates. The ability of multinational companies (MNCs) to move money across national boundaries is critical. MNCs depend on this ability for exports, imports, payment of foreign debts, and dividend remittances. Many factors affect a firm’s ability to move funds from one country to another. In particular, a country’s balance of payments affects the value of its currency, its ability to obtain currencies of other countries, and its policy toward foreign investments.The international monetary system consists of laws, rules, institutions, instruments, and procedures which involve international transfer of money. These elements affect foreign exchange rates, international trade and capital flows, and balance-of-payments adjustments. Foreign exchange rates determine the prices of goods and services across national boundaries. These exchange rates also affect international loans and foreign investments. Hence, the international monetary system plays a critical role in the financial management of multinational businesses and economic policies of individual countries.