Chapter 2World Trade and the International Monetary System

History is almost always written by the victors.

— Jawaharlal Nehru

This chapter begins with a discussion of trade in the world's markets for goods, services, and financial products. This is followed by a description of the balance-of-payments accounting system used to measure cross-border trade. The chapter then covers the international monetary system—the global network of commercial and governmental institutions within which exchange rates are determined—and the difference between fixed and floating exchange rate systems. The chapter concludes with a discussion of the role of the International Monetary Fund in currency crises.

2.1 Integration of the World's Markets

The world's markets for goods, services, and financial assets are becoming increasingly integrated across national boundaries. An integrated market is one in which equivalent assets sell for the same price in every location. In segmented markets, the price of an asset is not necessarily the same in all markets. Factors that contribute to market segmentation include transaction costs, regulatory and institutional interference, informational barriers, and labor immobility.

Globalization has been hastened by many factors, including a global trend toward free markets and an international equity culture, the 1995 creation of the World Trade Organization (WTO) for the negotiation and resolution ...

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