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Unit II International Monetary System For International Financial System Mcom Sem 4 Delhi University Notes

Unit II International Monetary System For International Financial System MCOM Sem 4 Delhi University : Here we provide direct download links for Unit II International Monetary System For International Financial System MCOM Sem 4 Delhi University Notes in pdf format. Download theseUnit II International Monetary System For International Financial System MCOM Sem 4 Delhi University Complete notes in pdf format and read well.

Unit II International Monetary System For International Financial System Mcom Sem 4 Delhi University Notes

Unit II International Monetary System For International Financial System MCOM Sem 4 Delhi University : International Monetary System is a Global payment system comprising of financial institutions, electronic networks, conventions, and agreed upon rules, for the smooth functioning of international trade. The international monetary system is the structure of financial payments, settlements, practices, institutions and relations that govern international trade and investment around the world. To understand the international monetary system, we can start by looking at how a domestic monetary system is structured. The Canadian financial system, for instance, is composed of a) a currency; b) a central bank which issues that currency; c) financial deposit-taking and lending institutions such as commercial banks and d) the Canadian Payments Association.

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Introduction

The currency used in Canada is the Canadian dollar. It is the means of payment, store of value and unit of account for all transactions conducted within Canada. It is the currency in which all assets and liabilities are measured. As such, exchange rates are not an issue in our domestic transactions. The country’s central bank, is the Bank of Canada. Its role is to issue the currency of the land, the Canadian dollar, to manage the supply of money to ensure that there is neither too much of it that could cause inflation, nor too little that could cause recession and to oversee the financial system, acting as a lender of last resort when the need arises. Commercial banks and other non-bank financial institutions are the main players in the financial system.

They engage in the process of financial intermediation, which is the taking of deposits from the private public that has a surplus of money and making loans to the public that has a shortage of money. In addition, commercial banks provide payment services such as chequing accounts, bank drafts, debit cards, credit cards, electronic payments, wire transfers and engage in the purchase and sale of foreign exchange.

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The Canadian Payments Association (CPA) is the payment system that provides the legal framework, the technological and communications infrastructure for the efficient operation of the payment system, like cheque clearing and reconciliation amongst the banks, electronic forms of payments, the shared automated bank payment system known as Interac, point of sales transactions, and other forms of payment. Internationally, countries require the same infrastructure and institutions but there are two major differences between the domestic and the international monetary systems:

1) Each country uses its own currency. This creates a need for a mechanism to convert each country’s currency to that of another and to determine the value of each country’s currency against the other. The role of determining the relative value of each country’s currency, what is known as the exchange rate, is performed by the foreign exchange market.

2) The international monetary system needs a payment system that is efficient and secure, this role is performed by commercial banks, which are the major players in the foreign exchange market. Corporations and individuals are the secondary players, they buy and sell through the banks. The international financial system relies on the domestic financial networks of each country to make it work. Since each country operates a different financial system there is no homogeneity in the international level. Banks in different countries are structured differently and they are regulated by different sets of rules and standards. This, in fact is one of the key challenges that the international financial system faces. Complicating the above is the fact that different countries pursue different monetary, trade and economic policies that cause the demand and supply of their currencies to diverge, which in turn cause continual fluctuations in the value of exchange rates.

The monetary system is based on money. Economists define money as a:

a. medium of exchange, i.e. a payment instrument

b. store value, a saving and investment instrument; and

c. unit of account, an accounting and measuring instrument

For centuries, the main instruments for settling international payments obligations have been precious metals like silver and gold. Beginning early in the nineteenth century, gold and silver begun to be supplanted by paper (or fiat) money, starting with the British pound in the 19th century and United States dollar since the middle of the 20th century. During the First World War most countries suspended the gold standard. Following the Second World War gold regained some of its previous role returning as a reserve currency for official central bank settlements though not as a payment instrument as was the case under the gold standard. In 1971, the United States rescinded its guarantee to exchange US dollars to gold, and gold’s role as an official payment instrument came to an end. Today, the US dollar serves as the de facto international medium of exchange, store of value and unit of account. In other words, it serves as the world’s money. Gold has been relegated to a secondary status as merely a reserve currency (i.e. a store of value for central banks) and as another metal traded on the world’s commodity markets

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Unit II International Monetary System For International Financial System MCOM Sem 4 Delhi University Notes

Unit II International Monetary System For International Financial System MCOM Sem 4 Delhi University :  There have been three major stages in the history of human economic development over the past 10,000 years:

• The agricultural revolution. During this stage people move away from a nomadic way of life based on hunting and gathering and annual migrations and begin to settle down and learn to cultivate the land and domesticate animals. The fruits from exploiting the land and husbandry allow people to enjoy a higher standard of living that results in higher population densities, the rise of cities and a drastic expansion of the total population that the land can support. We saw the first development of major human settlements such as villages and cities. Surpluses of food were exchanged through barter for other goods, the beginnings of trade, transportation networks, metal working and fabricating of tools, textiles, clothing, equipment and other goods takes place and in time we see the rise of early human civilization. Animals like pigs, sheep and cows served as early forms of currency. The source of the agricultural revolution is widely thought to be in the Fertile Crescent, the region in the Middle East that stretches from Mesopotamia, in present day Iraq to the Nile Valley in Egypt.

• The commercial revolution. Although commerce first started in the Fertile Crescent, it begun to spread gradually around the known world of the time. It is the ancient Phoenicians (modern day Lebanese), the Lydians in Asia Minor and later on the Greeks who were most responsible for its expansion. The Mediterranean Sea proved to be the most reliable and efficient transportation medium. With the construction of ships and the establishment of colonies all over the Mediterranean basin and Black Sea the Phoenicians and later on the Greeks built the first truly international commercial network. With the development of gold coins in the 6th century B.C. in Lydia, the commercial revolution found the greatest tool needed for the expansion of commerce, because it facilitated the process of trade and greatly reduced its cost. Now payment could be made in gold coins rather than in goods exchanged.

• The industrial revolution. Between 1750 and 1830 a new revolution takes place in Great Britain. The product of the rise of rationalism, scientific knowledge, individualism and innovations in production, and its applications to the business of life, the British start developing tools, machinery and industrial processes that revolutionize the way goods are produced. They introduced the factory as an organized production setting designed to bring together labour, materials, machinery and energy to produce in large quantities standardized manufactured goods. The mechanization of textile production, the development of the steam engine, the development of train transportation, steam ships, pig iron and steel production and, eventually with the development of the internal combustion engine, automobiles, the light bulb, electrical machinery and consumer appliances and the production of electricity, the world was completely revolutionized.

• The Information Revolution? Some thinkers have suggested that the world is now entering a forth stage of economic development, the information age, or the post-industrial society or the knowledge revolution, where new product development and economic activity will be driven by science and technology, especially in micro-electronics, communications, information and biogenetics. It is too early to say whether this is true or not.

Unit II International Monetary System For International Financial System MCOM Sem 4 Delhi University Notes

Unit II International Monetary System For International Financial System MCOM Sem 4 Delhi University :  Just as people in different countries speak different languages, they also transact business in different currencies, requiring conversion from one type of money to another. The International Monetary System system comprises the set of rules and practices that govern how debts are honored and paid between and among nations with different national monies.

Unit II International Monetary System For International Financial System Mcom Sem 4 Delhi University Notes

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