Key Concepts in International Finance and Economics
Role of the International Monetary Fund (IMF)
The IMF provides financial assistance to countries in crisis. It helps stabilize exchange rates and balance of payments. In return, it requires economic reforms.
Members of the International Financial System
It includes central banks, governments, commercial banks, the IMF, and the World Bank. It also includes financial markets and investors. Together, they manage global financial stability.
Why the US Dollar is the Global Reserve Currency
The dollar is widely used in international trade and finance. Central banks hold it as a reserve asset. This gives the US strong financial power.
Inflation and Price Stability Importance
Inflation is the general rise in prices over time. Price stability means low and predictable inflation. It protects purchasing power and economic confidence.
The Bretton Woods System
Bretton Woods was created in 1944 after World War II. It established fixed exchange rates linked to the US dollar. Its goal was global monetary stability.
Fixed vs. Floating Exchange Rates
Fixed exchange rates are set by governments or central banks. Floating rates are determined by market forces. Each system affects stability and flexibility differently.
Role of the World Bank
The World Bank provides long-term loans for development projects. It aims to reduce poverty and promote growth. It differs from the IMF, which focuses on crises.
International Reserves Defined
International reserves are foreign assets held by central banks. They include foreign currencies and gold. They are used to stabilize the national currency.
Quantitative Easing Explained
Quantitative easing is when central banks buy financial assets. This increases money supply and lowers interest rates. It is used during severe economic crises.
Why Central Banks Cannot Go Bankrupt
Central banks can issue their own currency. This allows them to meet obligations. However, excessive issuance can cause inflation.
What is Free Trade?
Free trade allows goods to move with few restrictions. It increases efficiency and specialization. However, it can harm some domestic industries.
Protectionism in Trade
Protectionism restricts imports through tariffs or barriers. It protects domestic industries from foreign competition. It can raise prices and reduce efficiency.
Comparative Advantage Principle
Comparative advantage means producing at a lower opportunity cost. Countries benefit by specializing. This increases gains from trade.
Globalization Defined
Globalization is the integration of global economies. It involves trade, capital, and information flows. It increases interdependence between countries.
Dependency Theory
Dependency theory argues poor countries depend on rich ones. This dependence limits development. It emphasizes global inequality.
The Center–Periphery Model
It divides countries into industrial centers and raw-material peripheries. Centers dominate production and trade. Peripheries remain economically dependent.