2. Relationship between the exchange rate and the current account
A decline in the exchange rate causes the national currency to appreciate and vice-versa. As a result, the trade balance goes up, leading to an increase in the current account. When the exchange rate goes down, the national currency depreciates also. This leads to an increase in the trade balance which causes the current account to decline. For example, in the graph, such an effect can be seen around the third quarter of 1978 where there was a decline in the trade balance while there was an increase in the market rate.
3. Bretton Woods System: 1944–1973
The Bretton Woods system is commonly understood to refer to the international monetary regime that prevailed from the end of World War II until the early 1970s. Taking its name from the site of the 1944 conference that created the *International Monetary Fund (IMF) and *World Bank, the Bretton Woods system was history's first example of a fully negotiated monetary order intended to govern currency relations among sovereign states. In principle, the regime was designed to combine binding legal obligations with multilateral decision-making conducted through an international organization, the IMF, endowed with limited supranational authority. In practice the initial scheme, as well as its subsequent development and ultimate demise, were directly dependent on the preferences and policies of its most powerful member, the United States.
1. In July 1944, 44 countries met in Bretton Woods, NH, to design the Bretton Woods system:
2. A fixed exchange rate against the U.S. dollar and a fixed dollar price of gold ($35 per ounce).
3. They also established the three pillars for the post-war new global economic and financial architecture:
* The International Monetary Fund, or IMF
* The World Bank
* General Agreement on Trade and Tariffs (GATT), the predecessor of World Trade Organization (WTO).
Bretton Woods System and the Japanese...