Functions and Time Value of Money and Foreign Exchange Transactions

International Finance and Global Capital
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International Finance and Global Capital
Functions of Money
Chapters 1-3 suggest that money has three crucial functions: serving as a medium of exchange, storing value, and serving as a unit of account (Eun & Resnick, 2015). Before the Discovery of money, people traded in a barter trade system, which involved the directed exchange of goods or services for other goods or services. The system was inherently faulty in that for a person to obtain a particular commodity or service from the supplier, they had to possess another commodity or service with equal value to that of the supplier. In other words, barter trade was only efficient if a phenomenon called a double coincidence of wants or desires existed between the transacting parties (Eun & Resnick, 2015). The probability of the double coincidence of wants is usually low, making exchanging goods or services with other goods difficult. Money eliminates this problem by acting as a medium of exchange to facilitate all transactions, irrespective of whether or not the transacting parties desire each other’s commodities. The Discovery of money has facilitated even international trade resulting in a globalized economy. For example, international trade is marked with international capital flows where the importer of goods gives the exporter a monetary payment, just as it is done at the domestic level. Money also stores value because for it to serve as a medium of exchange, it must hold a particular value over time (Eun & Resnick, 2015). The value each currency holds determines the amount or type of goods or services a person holding money gets. The value of a currency is determined by its supply and demand, which is, in turn, influenced by inflation, interest rates, money supply, and capital flow. The third function of money is that it serves as a unit of account, providing a common unit of measure of the value of commodities being exchanged. Knowing the price or value of a particular commodity in terms of money allows the purchaser and the supplier to decide how much of the good to purchase or supply.
Monetary Policy
Monetary policy refers to measures taken by governments or other authorities, such as international bodies, to influence economic activities, usually by manipulating the supply of money or credit or by altering interest rates (Eun & Resnick, 2015). At the domestic level, the monetary policy is in the realm of the country’s central bank, as observed in the case of the Bank of England since the Classical Standard Gold period. The central banks, such as the Bank of England, use three major instruments to regulate the money supply: open market operations, reserve requirements, and discount rates. International monetary policy or system, on the other hand, refers to a set of universally agreed conventions, rules, and international supporting institutions, such as the International Monetary Fund and the World Bank, that facilitate international investment, global trade, and generally capital flow between countries with different currencies (Eun & Resnick, 2015). For example, there have been various international monetary systems in t...