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AOF Business in the Global Economy

Lesson 8The International Monetary

System

Teacher Resources

Resource Description

Teacher Resource 8.1 List: Controversial Statements about the International Financial Institutions

Teacher Resource 8.2 Presentation and Notes: The IMF and the World Bank (includes separate PowerPoint file)

Teacher Resource 8.3 Answer Key: Balance of Trade Partner Activity

Teacher Resource 8.4 Sample: Economic Policy Recommendation Letter

Teacher Resource 8.5 Rubric: Economic Policy Recommendation Letter

Teacher Resource 8.6 Prompts: Learning Objective Reflection (separate PowerPoint slide)

Teacher Resource 8.7 Key Vocabulary: The International Monetary System

Teacher Resource 8.8 Bibliography: The International Monetary System

Copyright © 20092016 NAF. All rights reserved.

AOF Business in a Global EconomyLesson 8 The International Monetary System

Teacher Resource 8.1

List: Controversial Statements about International Financial Institutions

Choose six to eight of the following statements about international financial institutions (IFIs) to write on separate pieces of chart paper to post around the classroom. Share the information in italics during the classroom discussion.

Take-a-Stand Statements1. People behave recklessly when they know they will be saved if things go wrong. (From time to time the IMF provides economic help to countries in difficulties, through short-term loans with tough conditions. Some critics think it is unfair to keep banksand other players in financial marketsfrom failing if they have irresponsible policies or practices.)

2. One size fits all doesn’t actually fit anyone. (The IMF tends to apply a single economic doctrine in considering the economic policies of its member countries, despite widely differing individual circumstances. Many critics think this does not take regional or local differences sufficiently into account; some critics also think that the IMF staff of about 1,000 people is too small to do sufficient research on the appropriate measures for each member economy.)

3. Organizations with too much power lack accountability. (Some critics say the IMF and World Bank’s global reach encourages broad-brush decision making that does not take local issues of fairness and unemployment sufficiently into consideration. Others argue that these problems exist, not because of the IFIs’ global reach, but because their thinking has been so strongly influenced by the economic doctrine of laissez fairethe idea that the free market is almost always right and redistribution of income to the less fortunate is usually wrong.)

4. When making improvements, it is essential to build in a plan to sustain the improvements. (Critics say that the World Bank focuses on GDP growth rather than the sustainability of growth, and that its pro-growth policies can be detrimental to the environment, public health, and cultural diversity.)

5. A good policy can be ruined by bad implementation. (Some critics say that IFIs rush to implement free-market reforms and that these reforms are harmful to economic development if they are wrongly designed and/or implemented, causing a worse situation than they were trying to reform.)

6. Sometimes an offer can be too good to be true and have too many strings attached. (When IFIs make loans, the loan conditions often require structural adjustments, which are conditions that must be satisfied by member nations to receive loans. Some critics argue that corrupt governance in the borrowing country could mean an IFI loan might not help those who most need help.)

7. The only fair political representation is pure democracy. (Despite the fact that the World Bank has 188 member countries, only the most economically powerful sit on its board permanently. The president is always a US citizen, nominated by the president of the United States.)

8. The free market is the best economic model. (IFIs generally favor free trade and a reduction of trade barriers. Critics say free trade harms the environment, public health, and cultural diversity.



Some countries are not yet able to compete in the global marketplace and should not be pushed into lowering trade barriers too soon, which could lead to them becoming dependent on aid).

9. Water should be a publicly owned resource. (World Bank loan conditions sometimes pressure governments to change policies (e.g., to privatize the water supply, increasing prices to users.)

10. IFIs should give grants that do not need to be repaid to countries in need of help. (IFIs offer loans, not grants, in order to encourage efficient use of the money and so that they can use the interest to give more loans.)




Presentation Notes: The IMF and the World BankBefore you show this presentation, use the text accompanying each slide to develop presentation notes. Writing the notes yourself enables you to approach the subject matter in a way that is comfortable to you and engaging for your students. Make this presentation as interactive as possible by stopping frequently to ask questions and encourage class discussion.

In 1944, as World War II was coming to a close, governments of more than 40 countries met in Bretton Woods, New Hampshire, at the United Nations Monetary and Financial Conference. There they formed two organizations. One was the International Monetary Fund (the IMF) and the other was the World Bank. The countries involved wanted to prevent worldwide economic troubles that could lead to instability throughout the world and possibly even war.

The purpose of these two international financial institutions (IFIs)was to help prevent a new meltdown in the worldwide economy and also to help countries that needed to rebuild after the war. Though the two IFIs have many similarities, each serves a distinct purpose in dealing with the member nations and the global economy.

During their creation, the IFIs were controversial. Governments of participating countries argued about how much influence each would have over the IFIs and how much money they would each need to invest. The IMF and World Bank were intended to foster peace and prosperity throughout the world, and many people feel that they have generally done so, even if imperfectly. However, many other people view IFIs as oppressive tools that prosperous countries use to impose their will on developing countries and not to the advantage of the developing countries.

Presentation notes



When the founding member countries came together to create the IMF, they did so in order to deal with international monetary difficulties, to ensure free convertibility of currencies (which would help international trade grow), to ensure that international currency exchange rates remained stable, to ensure that instability in exchange rates and interest rates did not hurt trade, and to ensure that debts owed by one country to another could be repaid in an orderly way.

The IMF does its job by performing three functions: financial assistance, surveillance, and technical assistance.

Providing financial assistance when major international crises happen is the IMF’s primary function. But in order to get the money, the country seeking an IMF loan must usually agree to make changes to its economic policies. These changes are based on the IMF’s analysis of what got the country into economic trouble in the first place. The loans are at a variety of interest rates and for various lengths of time. The rate and duration of the loan depend on the state of the borrowing country’s economy and the intended use of the money.

Presentation notes



A second function of the IMF is surveillance. The IMF staff visits each member country and examines many aspects of its economy. These include its exchange rate, monetary policies, and fiscal policies. (Monetary policies involve changing the interest rate; fiscal policy involves changing tax rates and government spending levels.)The IMF also does research on regional communities of countries, such as the European Union, and on the global economy.

The IMF provides technical assistance in such areas as monetary and tax policy and in the collection of economic data. It helps governments and central banks collect data and make policies on exchange rates and balance of payment issues.

Presentation notes



In 2008, the world entered the worst financial crisis since the Great Depression. The IMF was supposed to head such a disaster off at the pass; that’s why one of its jobs is to monitor the financial health of countries around the globe.

But the IMF failed to see the signs of the Great Recession, as it has come to be known. Upon self-scrutiny, they realized that the macroeconomists at the IMF thought that the financial systems of advanced countries like the United States were sound, resilient, and able to redistribute risks. They also saw that the way the IMF is structured prevented different parts of the organization from sharing key information and getting a full picture of what was happening. Most importantly, the IMF staff did not pay enough attention to analysts outside of their organization. In 2011, the IMF created a set of reforms to their organization to make such an oversight much less likely in the future.

Even though the IMF didn’t see the recession coming, it has played an important role in mitigating, or lessening, the crisis. It has provided financial support to countries that have been deeply affected. It has channeled its surveillance into the recovery effort. Finally, it has coordinated global and regional responses to the recession.

Presentation notes



The International Monetary Fund is based in Washington, DC. Two bodies control it. The board of governors meet once a year to deal with big issues and to vote on what’s to be done. There is also an executive board that makes daily decisions.

The members of the executive board run different departments within the IMF. For instance, there are groups for various regions of the world as well as for a variety of issues, such as fiscal planning and research and statistics.

Finally, the International Finance and Monetary Committee meets twice a year. Its purpose is to provide the IMF staff with suggestions and advice.

For all three bodies, a country’s voting power is based on a complex set of rules that give by far the most votes to the countries with the largest economies and that have provided the largest amount of funding to the IMF over time.

The World Bank has a similar structure. It also has a governing board. Voting power here is unequal, as it is in the IMF: it generally corresponds to how much money each country contributes to the World Bank.

Presentation notes



The World Bank Group deals with money in both the public and private sectors. It offers governments advice and provides research to help governments manage their economic policies. In developing countries, the World Bank strengthens governments. It creates legal and political systems that encourage business. It provides research, consulting, and training as well. The World Bank also works with private business projects that benefit the economy. It offers low-interest loans, grants, and free-interest credit. It develops financial systems and combats corruption.

The overall goal of the World Bank is to reduce poverty. It also tries to increase access to education and medical care and to protect the environment, all while promoting economic development. Projects to improve an area’s economy have included building roads to connect communities in rural Peru, giving microcredit (less than $1,000) loans to small-business owners in developing countries, and helping poor mothers and children get access to medical care.

How is the World Bank funded to do this work? The 184 countries that are members of the IMF pay a subscription fee for their membership. This money is then used to fund the World Bank.

Presentation notes



Though these two IFIs are different, they do have many similarities. They were created at the same time by a large group of countries. Their creation was part of a UN effort to help the global economy run in a smooth and stable way. Both of the IFIs have similar structures, with governing bodies made up of representatives from the member countries.

Both organizations have come under criticism. Some say their policies put poor people at a disadvantage and help rich corporations, and some feel that they threaten national sovereignty.

Though the IMF and World Bank are alike in many ways, they have distinct purposes. The IMF’s main goal is to make sure that the system of payments between countries runs smoothly. It lends money to governments when they need it. But it also monitors the policies and actions that determine countries’ currency exchange rates. It deals with large economic issues that are occurring between countries.

The World Bank, on the other hand, helps developing countries pay for economic development projects and needed services. It lends money to the governments of these poor countries to help pay for such projects. Unlike the IMF, which is focused on monetary issues, currency, banking, and macroeconomics, the World Bank is focused on microeconomic policies and structures for particular sectors of the economy (such as electricity or transportation), and on the funding of specific projects in those sectors.

Presentation notes




Answer Key: Balance of Trade Partner Activity

2012 Balance of Trade Figures for (M)BRICS(K) Countries in US Dollars

GDP (PPP

adjusted) ($trillion)

Real GDP

Growth Rate (%)

Exchange Rate Yearly Change (%)

Inflation Rate

(%)

Current Account Balance ($billion)

Unemployment Rate (%)

MEXICO 1.8 3.9 -5.8 4.1 -14.1 4.9

BRAZIL 2.3 0.9 -16.8 5.5 -54.2 5.4

RUSSIA 2.5 3.4 -5.8 5.3 71.4 5.2

INDIA 4.7 6.5 -13.8 6.0 -91.5 9.9

CHINA 12.3 7.8 +2.4 3.1 193.1 4.1

S. KOREA 1.6 2.0 -1.9 2.2 43.3 2.9

S. AFRICA 0.6 2.5 -13.1 5.2 -24.1 25.5

Questions and Answers:

1. Which countries have trade deficits?

Mexico, Brazil, India, and South Africa all have trade deficits.

2. Which countries have trade surpluses?

Russia, China, and South Korea all show positive current account balances.

3. GDP reflects (in part) the purchasing power of consumers. If a country’s GDP falls, consumers are usually less able to purchase foreign goods, so the country’s imports decline. If GDP grows, con-sumers will probably buy more imports, decreasing any trade surplus, or increasing a trade deficit. Which countries are most likely to see a change in the value of their currency for this reason? Why?

Inflation and trade deficits tend to decrease the value of a currency. For 2012, India seems to be most at risk for inflation to cause currency devaluation. Brazil’s trade deficit (shown by the current account balance) puts it at risk for currency devaluation. Strong GDP growth rates also might put the currencies of China and India at risk of devaluation.

4. Compare the GDP growth rates of China and Brazil in 2012. How will their respective GDP growth rates likely impact their balance of payments?

China’s GDP growth rate is more than eight times larger than Brazil’s growth rate, which means that, of the two countries, Brazil should see a smaller increase in imports than China due to lower domestic purchasing in Brazil than in China. Since China’s growth rate is so much larger than Brazil’s, one would expect China to have a much larger trade surplus than Brazil. In fact, Brazil had a trade deficit in 2012.



5. Which countries might expect to see a change in employment numbers? Why?

Russia, China, and South Korea all have trade surpluses and this should have a favorable effect on employment, as people are hired to produce the exports. Both Brazil’s and India’s large trade deficits may have an unfavorable effect on unemployment in those two countries.




Sample: Economic Policy Recommendation LetterMarch 30, 2016

Mark Manuel, Senior Economic Advisor on Special Assignment235 Forest DriveGrandingham, LA 70142

World Bank1818 H Street NWWashington, DC 20433

Dear Sir/Madam:

After examining Pankotoa’s economic situation this year, I have concluded that there are three potential changes to economic policy that would benefit both Pankotoa and the global economy: trade policy, currency management, and interest rates. I have carefully considered each factor and recommend a change to trade policy to help Pankotoa become more economically successful in the global economy.

Pankotoa reported a trade deficit of approximately 3 million USD last year. This trade deficit has caused the gondo, Pankotoa’s currency, to remain artificially low. The fixed exchange rate on the gondo helps keep inflation low and goods for Pankotoans affordable but contributes to high unemployment (17% last year) and a declining GDP. In addition, interest rates remain high at an average of 18.4%, which means that few Pankotoans are able to make new purchases to stimulate the economy. The combination of these economic factors means a declining Pankotoan economy and a declining quality of life for its citizens.

In order to make the economy begin to grow, I recommend that the World Bank work with Pankotoa to change its trading policy to encourage increased exports. Pankotoa has goods suitable for export (including its major crop, coconuts) and should invest in a factory to make more coconut products. If Pankotoa makes this change toward encouraging exports, it should see a rise in employment. Increasing the number of employed people will result in increased bank deposits, and then Pankotoan banks will have more capital to lend, which should result in decreased interest rates. This will allow more Pankotoans to have money available to spend in the local economy. Encouraging export will help Pankotoa become a stronger economy and a more influential country on the global economic scene. Please contact me with any questions.

Respectfully,

Mark Manuel




Rubric: Economic Policy Recommendation LetterStudent Name:_____________________________________________ Date:_______________

Exemplary Solid Developing Needs Attention

Thesis Statement

The thesis statement is correctly placed at the beginning of the letter, presents the topic, and clearly outlines the main points to be discussed.

The thesis statement presents the topic and is correctly placed at the beginning of the letter.

The thesis statement mentions some of the main points to be discussed but does not present the topic and may not be well placed at the beginning of the letter.

The thesis statement does not present the topic, is not correctly placed, and does not outline what will be discussed.

Reasons and Support

Three or more excellent points are made with good support. It is evident the writer put much thought and research into this assignment.

Three or more points are made with support, but the arguments are somewhat weak in places. The writer doesn’t persuade completely.

Two points are made; shows some preparation, but arguments are weak.

Arguments are very weak or completely missing.

Evidence, Examples, and Explanations

All of the evidence and examples (facts, statistics, and real-life experiences) are specific and relevant. Explanations show how each piece of evidence supports the author’s position.

Many of the examples and pieces of evidence are specific and relevant. Explanations try to show how each piece of evidence supports the author’s position.

At least one piece of evidence or one example is relevant and has an explanation that shows how it supports the author’s position.

Evidence and examples are not relevant and/or are not explained.

Focus Maintains complete topic focus throughout the piece.

Maintains consistent topic focus throughout the piece.

The piece has some lapses in topic focus.

Serious lack of topic focus.

Vocabulary Exhibits skillful use of new and vivid vocabulary that is precise and purposeful.

Exhibits proficient use of new vocabulary that is purposeful.

Exhibits minimal use of new or vivid vocabulary, and new vocabulary is not precise.

Lacks use of new vocabulary. Language is dull and tedious.

Mechanics No grammatical, spelling, or punctuation errors. All sentences are well constructed and vary in structure.

Few grammatical, spelling, or punctuation errors. Most sentences are well constructed, with

Some grammatical, spelling, or punctuation errors. Most sentences are well constructed, with

Many grammatical, spelling, or punctuation errors. Most



Exemplary Solid Developing Needs Attention

some variation in sentence structure.

little variation in sentence structure.

sentences are poorly constructed.

Additional Comments:

_____________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________




Key Vocabulary: The International Monetary System

Term Definition

balance of payments The difference between the total of all payments into a country from other countries for goods, services, and investments and the total of all payments from the country to other countries for goods, services, and investments.

balance of trade The difference in value between a country’s imports and exports.

Bretton Woods A 1944 conference in New Hampshire to stabilize the world’s currency system. It led to the creation of the IMF and the World Bank.

central banks Organizations established by governments to issue and manage a currency, manage that currency’s exchange rate, influence the country’s interest rate, monitor and regulate the creation of credit by the banking system, and act as the lender of last resort to the banks to keep the banking system stable in emergencies.

competitive devaluation A pre-WWII global economic problem where countries devalued their currencies in the effort to be more competitive with other countries in selling exports but only provoked other countries to do the same, which lead to global economic instability.

convertibility Description of currency that can be bought and sold freely on the foreign exchange (FX) market, is readily available, and can be used for normal lawful purposes without any restrictions.

current account The account showing the total flows of money into and out of a country, not including flows of money for the purpose of making investments.

current account balance of payments

The difference between the current account inflows into a country and the current account outflows from that country.

G7 A forum of the governments of France, Germany, Italy, Japan, the United Kingdom, the United States, and Canada. Also refers to meetings of their finance ministers.

G-20 A consultative group of the governments of the 20 largest national economies (including the EU) that meets periodically to discuss policy. Also refers to meetings of their finance ministers.



Term Definition

gold par value The amount of currency needed to purchase one ounce of gold.

gold standard An exchange rate regime that pegs the value of a currency to gold and guarantees that all issued currency can be converted to gold on demand.

international financial institutions (IFIs)

The financial institutions established by governments of multiple countries to promote economic development and manage the international monetary system.

laissez-faire The principle that the free market is almost always right and redistribution of income to the less fortunate is usually wrong. It originated as an economic theory in the 18th century that strongly opposes any government intervention in business affairs, such as tariffs or subsidies.

(M)BRICS(K) An acronym of Mexico, Brazil, Russia, India, China, South Africa, and South Korea. Some economists believe that the (M)BRICS(K) countries will constitute a very large part of the world economy by 2050.

regional bank A bank that operates in a region of the United States, as opposed with a bank that operates across the country.

renminbi The currency system of China. The principal unit of the currency is the yuan.

volatile Likely to change quickly and unpredictably, especially for the worse.

World Bank An international financial institution established to promote economic development.

yuan A unit of the national currency of China, the renminbi, with a value (in 2013) of about 0.15 USD




Bibliography: The International Monetary SystemThe following sources were used in the preparation of this lesson and may be useful for your reference or as classroom resources. We check and update the URLs annually to ensure that they continue to be useful.

PrintCzinkota, Michael R., et al. Fundamentals of International Business. Mason, Ohio: South-Western, 2004.

Hill, Charles W. L. Global Business Today. New York: McGraw-Hill, 2006.

Online“Balance of Payments.” NationMaster.com: http://www.nationmaster.com/country-info/stats, (accessed May 13, 2016).

“Balance of Payments.” Wikipedia, http://en.wikipedia.org/wiki/Balance_of_payments (accessed May 13, 2016).

“Brazil Balance of Trade.” Trading Economics, http://www.tradingeconomics.com/Economics/Balance-of-Trade.aspx?Symbol=BRL (accessed May 13, 2016).

“BRICS.” Wikipedia http://en.wikipedia.org/wiki/BRICS (accessed May 13, 2016).

Caggeso, Mike. “Inflation Recedes in China, Interest Rates Could Be Next.” Money Morning, http://www.moneymorning.com/2009/03/10/china-consumer-prices/ (accessed May 13, 2016).

“China Inflation Hits Fresh High.” BBC.co.uk, updated March 11, 2008, http://news.bbc.co.uk/2/hi/business/7288940.stm (accessed May 13, 2016).

Heakal, Reem. “What Is the World Bank?” Investopedia, http://www.investopedia.com/articles/03/042303.asp (accessed May 13, 2016).

Hult, Thomas. “The BRIC Countries.” Global Edge, http://globaledge.msu.edu/content/gbr/gbr3-4.pdf (accessed May 13, 2016).

“International Financial Institutions.” Wikipedia, http://en.wikipedia.org/wiki/International_financial_institutions (accessed May 13, 2016).

Lamdany, Ruben. “Crisis Prevention and Management: Lessons from the IMF Experience in the Great Recession,” pdf (accessed May 13, 2016).

Pettinger, Tejvan. “Difference Between Monetary and Fiscal Policy,” Economics Help, http://www.economicshelp.org/blog/1850/economics/difference-between-monetary-and-fiscal-policy/ (accessed May 13, 2016).

“Renminbi.” Wikipedia, http://en.wikipedia.org/wiki/Renminbi (accessed May 13, 2016).

“Trade in Goods with Brazil.” U.S. Census Bureau, http://www.census.gov/foreign-trade/balance/c3510.html (accessed May 13, 2016).

“United States’ Trade Balance from 2000 to 2015 (in Billion US Dollars),” Statista, http://www.statista.com/statistics/220041/total-value-of-us-trade-balance-since-2000/ (accessed May 13, 2016).

“US-China Trade Agenda.” The US-China Business Council, May 30, 2013, https://www.uschina.org/reports/trade-agenda-may-30-2013 (accessed May 13, 2016).


https://www.uschina.org/reports/trade-agenda-may-30-2013

http://www.statista.com/statistics/220041/total-value-of-us-trade-balance-since-2000/

http://www.census.gov/foreign-trade/balance/c3510.html

http://en.wikipedia.org/wiki/Renminbi

http://www.economicshelp.org/blog/1850/economics/difference-between-monetary-and-fiscal-policy/

http://en.wikipedia.org/wiki/International_financial_institutions

http://globaledge.msu.edu/content/gbr/gbr3-4.pdf

http://www.investopedia.com/articles/03/042303.asp

http://news.bbc.co.uk/2/hi/business/7288940.stm

http://www.moneymorning.com/2009/03/10/china-consumer-prices/

http://en.wikipedia.org/wiki/BRICS

http://www.tradingeconomics.com/Economics/Balance-of-Trade.aspx?Symbol=BRL

http://www.tradingeconomics.com/Economics/Balance-of-Trade.aspx?Symbol=BRL

http://en.wikipedia.org/wiki/Balance_of_payments


“US Current-Account Deficit Decreases in Fourth Quarter 2015,” Bureau of Economic Analysis, https://www.bea.gov/newsreleases/international/transactions/trans_highlights.pdf (accessed May 13, 2016).

“What Europe Thinks about Globalization.” Globalization101, http://www.globalization101.org/what-europe-thinks-about-globalization-2/ (accessed May 13, 2016).

“World Bank.” Wikipedia, http://en.wikipedia.org/wiki/World_bank (accessed May 13, 2016).


http://en.wikipedia.org/wiki/World_bank

http://www.globalization101.org/what-europe-thinks-about-globalization-2/

http://www.globalization101.org/what-europe-thinks-about-globalization-2/

https://www.bea.gov/newsreleases/international/transactions/trans_highlights.pdf

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