Book Title
International Business: The Challenge of Global Competition 13th Edition

978-0077606121 Chapter 8 Answers to Questions

April 7, 2019
Chapter 08 - The International Monetary System and Financial Forces
1. Briefly outline the advantages and disadvantages of the gold system.
2. Was the Bretton Woods system bound to fail if it were successful?
This question goes to the Trin Paradox. The Bretton Woods system support-
ed substantial international trade growth during the 1950s and 1960s. Other
countries changed their currency’s value against the dollar and gold, while
the U.S. dollar remained )xed. This meant that the United States, in order to
4. If all nations used the SDR, what might the impact be on business?
The impact on business would be to greatly reduce risk because there would be no exchange rate
Chapter 08 - The International Monetary System and Financial Forces
5. If your firm is generating considerable revenues in operations in a country that suddenly and
without warning imposes exchange controls that prohibit the purchase of foreign currency within
the country and the export of the currency, what are some of the issues you'll want to discuss
with your regional finance staff?
You have a problem with repatriation of profits generated in that currency and with recouping your
6. Your U.S. firm is about to sign a contract to supply services to a bank in Beijing, with a up-
-front payment agreement of 50%. Would you want this payment in U.S. dollars? Why or why
If you get paid US dollars today you are out of the "exchange rate gain/loss" risk game. This is the
7. While the Federal Reserve has been slashing interest rates, the European Central bank is hold-
ing interest rates steady. Could this policy difference have influenced the relative strength of the
dollar against the euro? Why?
8. Your Boston-based company earned 54% of its profits from Germany and France. Given your
answer in question 7, are you happy today? Why?
9. Your Munich-based company earns 64% of its revenues from high precision auto component
exports to the U.S. You need to expand manufacturing capacity, and the U.S. market has great
growth potential for your product. Given your answer in question 7, where would you add capac-
ity, in Germany or the U.S.? Why?
You would add capacity in the USA. Key inputs like labor and land will continue to be more attractive in
10. Why should managers regularly monitor the BOP of the countries in which their business op-
Chapter 08 - The International Monetary System and Financial Forces
Loans are made in Special Drawing Rights (SDR). SDR is a basket of currencies,
created by the IMF in 1969 to facilitate international trade. Currently, the basket of
Exercise One
Your company imports video equipment from Japan to sell in the U.S. The exchange rate
fluctuations over the past year have had significant impact on your bottom line. In preparing an
annual report for your company, you would like to include a one-year currency chart showing
the movement of the U.S. Dollar versus the Japanese Yen. Describe the pattern you see. Over the
past year, has the Dollar gained or lost ground versus the Yen?
Exercise Two
As an entrepreneur, you are interested in expanding your business to either Germany or
Australia. As part of your initial analysis, you would like to know how much minimum
Chapter 08 - The International Monetary System and Financial Forces
investment is needed to enter each of these markets. To have an appropriate estimate, you hire a
consulting firm to perform an initial investment analysis. The consulting firm provides a short
report concerning the level of minimum investment needed for each country. Taken from the
report, the minimum investment amounts enclosed are: 24 million Euros (EUR) or 30 million
Australian dollars (AUD). To make a clear comparison by using current exchange rates, you
must convert each currency to U.S. dollars and suggest which country provides the better