The international monetary system is an international convention. It stipulates the rules that should be applied in international trade. The system also clarifies the means of payment that should be used in international trade. Generally, the international monetary system was set in order to promote international trade and investment (Hill, 2010).
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Different currencies are used in different countries. A currency that is acceptable in one country may not be generally accepted in another country. For example, a dollar is not legally accepted as a medium of exchange in England. This indicates that the use of different currencies do not favor international business transactions. For a person to carry out business in another country, he/she should use currency that is legally accepted in the foreign country.
For instance, if an American wants to purchase some goods in England, the buyer should exchange the dollars for the pounds. One of the functions of the international monetary system is to facilitate currency exchange activities. In order to understand how the international monetary system works, a learner should understand the following concepts:
An exchange rate system compares the prices of different currencies. Exchange rate systems are determined by the demand and supply of various currencies in the market where trading of currencies takes place. Exchange-rate systems define rules that govern the rates at which various currencies perform in the currency exchange market.
Balance of Payments
Balance of payments is used to record all international transactions that take place in a country. When a country exports some goods, the details of the transaction are recorded in the country’s balance of payment. Details of transactions such as loans to other countries are also recorded in the balance of payments.
The study of the concept of the international monetary system is very important. It makes it easy to understand how international trade is conducted.
Lessons Learnt From the Concept of International Monetary System
The international monetary system has undergone a lot of evolutions. In the past, various items were used as currency. For instance, precious metals such as gold and bronze were used as a medium of exchange. The international monetary system gives a hint on how currency has evolved. The international monetary system is not a product of negotiations. It is not a product of the Bretton Woods conference. The emergence of the system is historical. It is not a Federal Reserve program but it represents judgments of those who have interest in currency.
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The international monetary system has various institutions that enable it to function smoothly. One of the institutions is the International Monetary Fund. The International Monetary Fund is an institution that has played a significant role in the implementation of the system. It has also promoted smooth flow of transactions between different nations.
It is important to understand that the international monetary system has undergone a lot of reforms. The reforms are triggered by global economic upheavals. Since 1990, a lot of discussions about the reforms have been held. In fact, the discussions are still underway. Coordination of policies, global governance and management of crisis are some of the issues that are yet to be resolved.
There are several things that can be learnt from the international monetary system. It is a wide topic. The topic lacks a conclusion because it is subject to reforms. Therefore, this field is ideal for those who want to widen their understanding of international trade. Individuals who want to understand how the International Monetary Fund Works will also learn a lot from the international monetary systems.
Hill, C. (2010). International Business . Secaucus: MCGRAW-HILL Higher Education.