International exchanges of goods and services must eventually be translated into monetary transactions between the buyers and sellers of goods and the users and suppliers of services. For example, when a U.S. citizen purchases a Japanese car for, say, $10,000, this money (minus the domestic merchant's profit) leaves the country and goes to Japan. Similarly, when a Japanese citizen buys an American computer for, say, 100,000 yen, this money (minus the Japanese merchant's profit) leaves Japan and comes to the United States.
These movements of money across national boundaries do not occur directly. In other words, the U.S. dollars do not actually travel to Japan, nor do the Japanese yen come to the United States. The individual people or organizations engaged in the goods transactions do not even perform the money transactions. The entire process is carried out through the intermediation of a financial institution, usually a bank, which is authorized by the government of the country to handle the process.
The Japanese car producer who sells a Japanese car to an American has little use for dollars; dollars cannot be used to pay the Japanese workers or the suppliers of the raw materials used to produce the car. What the Japanese producer needs is, of course, yen. The producer solves this problem by exchanging dollars paid by the purchaser for yen. The number of yen the Japanese producer gets for each dollar paid for the car is called the exchange rate. Many international financial problems are associated with the way exchange rates for the world's currencies are determined and maintained.
This chapter begins with a brief look at some theories of exchange rate determination. Then the chapter traces the evolution of the International Monetary System. After a short section on record-keeping and reporting of international financial transactions among countries, the concluding section presents the contemporary global financial scene and highlights some of the international financial problems that are of concern to the international manager.
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