Reference no: EM132255522

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It represents the difference between the total amount of money coming into and going out of a country. Consider a Canadian MNE that builds a factory in China. In the process, money flows from Canada to China, generating a deficit item for Canada and a surplus item for China in their respective balance of payments. The balance of payments is affected by other transactions as well, as when citizens donate money to a foreign charity, when governments provide foreign aid, or when tourists spend money abroad. The Bretton Woods Agreement was initiated to peg the value of the U.S. dollar to an established value of gold, at a rate of $35 per ounce. The U.S. government agreed to buy and sell unlimited amounts of gold in order to maintain this fixed rate. Each of Bretton Woods' other signatory countries agreed to establish a par value of its currency in terms of the U.S. dollar and to maintain this pegged value through central bank intervention. In this way, the Bretton Woods system kept exchange rates of major currencies fixed at a prescribed level relative to the U.S. dollar and, therefore, to each other. Floating Exchange Rate System-Under this system, governments refrain from systematic intervention and each nation's currency floats independently, according to market forces. Major world currencies-including the Canadian dollar, the British pound, the euro, the U.S. dollar, and the Japanese yen-float independently on world exchange markets. Their exchange rates are determined daily by the forces of supply and demand. Fixed Exchange Rate System-The value of a currency is set relative to the value of another (or to the value of a basket of currencies) at a specified rate. The system is sometimes called a pegged exchange rate system.