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Businesses that sell products to businesses in other countries must consider the value of money in other countries.

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Buying from and selling to international partners requires knowing how to manage money. This includes understanding the impact of exchange rates on trading relationships.

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Currency Management

Investors know that greater risk is associated with greater return.

Greater risk increases the chance that you will lose money.

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Money and Currencies

A market is any place where money is exchanged for things of value.

money

anything that people accept as a form of payment

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Money and Currencies

The item must be accepted by a group of people.

If there is a short supply of a product, it becomes more valuable.

The item will not easily spoil or become damaged.

The item can be divided into smaller units.

The item must be small enough that people can carry it easily.

Acceptability

Scarcity

Durability

Divisibility

Portability

The Five Characteristics of Money

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Selling for Seashells In Asia and Africa, cowrie shells were used as money for centuries. These tiny seashells from the Indian Ocean became symbols of currency. Today the currency of Ghana in Africa is called “cedi,” a form of the Ghanaian word meaning “cowrie shell.”

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Uses of Money

As a measure of value, money tells you what something is worth.Everyone assigns a relative value to goods and services.

Measure ofValue

The Three Main Purposes of Money

As a medium of exchange, money works only if people trade goods and services for it.

Medium ofExchange

Some people save gold, because they believe it will hold valuein the future. Confidence in a form of money is an importantpart of financial stability.

SavingsMechanism

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Barter

Barter is an exchange of goods or services without the use of money.

Barter expresses value and is a medium of exchange.

Barter is difficult to tax.

Barter usually takes place domestically.

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Currency

Know the currency in the country where you intend to trade.

currency

the form of money used by a specific country or region

The symbol “$” represents the currencies of many countries.

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Currency

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Currency Exchange

If the currency exchange rate is US$1.00 to € .82, then it takes one U.S. dollar to buy .82 euro.

currency exchange rate

the rate at which one country’s currency can be traded for another country’s currency

The ratio is 1 to .82

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Hard Currency

Another name for hard currency is convertible currency.

hard currency

a currency that can be exchanged for other currencies at uniform rates in financial centers around the world

Both the U.S. dollar and the euro are examples of hard currency.

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Soft Currency

A soft currency may only be used to buy and sell goods within a country.

soft currency

an unstable currency that is not exchanged at major financial centers

Soft currencies are found in underdeveloped and developing nations.

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Exchange Rates and International Business

Money establishes the relative value of goods

and services.

When the value of one currency changes, its price in international markets fluctuates.

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When Currency Changes Value

The retailer can raise the price of the sandals to compensate for the loss.

The retailer can keep the price as it is and lose money each sale.

The retailer in Spain is now losing one dollar per pair of sandals.

The exchange rate suddenly changes, and the euro loses value comparedto the U.S. dollar. The euro is now only worth nine dollars.

A company in Spain sells the sandals for nine euros (€9), which is about ten U.S. dollars ($10).

A U.S. company makes and sells sandals.

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Factors Affecting Exchange Rate

Several factors affect exchange rates and cause currency value fluctuation.

currency value fluctuation

the change in value of one country’s currency when it is traded for another country’s currency

Balance of Payments

Economic Conditions

Political Conditions

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Balance of Payments

A country with an unfavorable balance of payments is importing more products than it is exporting.

An unfavorable balance of payments can occur when residents leave with money and spend it in other countries.

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Balance of Payments

Characteristics of a Country with Unfavorable Balance of Payments

Negative impact on unemployment

Negative impact on interest rates

Negative impact on the value of currency

Less currency is available

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Economic Conditions

Higher interest rates slow down purchases and investments.Interest Rates

Four Indicators of Economic Conditions

Inflation is a rise in price of goods and services. This meansyou must pay more money to buy the same amount ofgoods and services you bought last year.

Inflation Rates

When the GDP rises, a country’s economy is strong.Economic Growth

and Decline (GDP Levels)

A high unemployment rate is one sign that a nation’s economy is weak.

Unemployment Rates

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Economic Conditions

Gross Domestic Product (GDP) is the total value of all goods and services sold in a country.

Gross National Product (GNP) is more specific than GDP and is based on the value of GDP.

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Political Conditions

The possibility of war or the overthrow of a government will cause a country’s currency to lose value.

Expropriation is a major political risk involved in doing business in an unstable country.

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When in Luxembourg

Meeting and Greeting Shake hands with everyone present and again when you leave.

Business Etiquette Meetings start on time; call with an explanation if you are late. Meetings are usually brief.

Business Dress Men wear suits and ties, or a sports coat and dress pants. Women wear dresses or suits.

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Exchange Rate Problems

Exchange Rate Problems

Rising inflation levels

Rising interest rates

Lower profits

Difficulty selling items because of price changes

Difficulty trading

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Managing Exchange Rates

Two approaches for managing exchange rates are:

Market measures

Nonmarket measuresThe goal of these measures

is to create a “level playing field.”

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Market Measures

Devaluation of a currency helps local vendors protect sales and profits.

Devaluation can be used as a tool to encourage deflation instead of inflation.

Devaluation may result in reduced importation of goods and other currencies.

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Nonmarket Measures

Nonmarket measures include:

Tariffs

Quotas

Exchange controls

Limits on travel

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International Financial Organizations

The international monetary system is a network of international organizations that try to help individual countries create and participate in trade.

International Monetary Fund (IMF)

World Bank

European Economic andMonetary Union

Other Exchange Organizations

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International Monetary Fund (IMF)

The IMF tries to help countries by doing three things:

1. Monitors purchases and sales of goods to observe the balance of trade

2. Suggests economic policies that might help improve trade

3. Makes loans

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World Bank

The activities of the World Bank include:

Providing loans

Helping to build and improve communication and transportation systems

Helping to build and improve energy plants

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World Bank

The goal of the World Bank is to help countries develop international trade through its organization, the International Development Association (IDA).

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European Economic and Monetary Union

The European Economic and Monetary Union (EMU) is the financial agreement that guides the economies of the European Union (EU).

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Other Exchange Organizations

Other exchange organizations include:

Asian Development Bank (AsDB)

European Bank for Reconstruction and Development (ERDB)

Inter-American Development Bank (IDB)

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Financing an International Business

Many financial institutions help businesses in underdeveloped countries obtain start-up capital.

capital

money needed to establish a business and operate it for the first few months, or to expand an existing business

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Financing an International Business

Ways to Obtain Capital

Intercompany Financing Equity Financing

Debt Financing Local Currency Trading

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Intercompany Financing

The two ways to obtain intercompany financing are:

Borrow or receive capital from an existing parent company.

Obtain loans from other corporations.

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Equity Financing

Equity financing is the method a company uses to raise capital by selling shares of a stock.

Owning one share of stock gives you one vote to elect the company’s board of directors.

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Debt Financing

Debt financing occurs when a company takes out long-term loans to obtain capital.

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Debt Financing

Three sources of debt financing for international operations are:

International bank loans

Euronote markets

International bond markets

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Local Currency Financing

Local banks can sometimes be the best place to find capital.

Banks may allow a new business to write a check, or overdraft, as a form of loan.

Non-bank loans may come from private companies.