SF18Delta
11-28-2009, 12:13 PM
Why do we need the IMF?
Smoothing the bumps in the flow of foreign exchange
Before people from different countries can buy or sell anything to each other, they have to solve a basic problem. Buyers have to be able to change their money from their country's currency to the seller's national currency. This is called "foreign exchange." Each currency, whether it's the US dollar or the Haitian gourde, has a value in terms of other currencies. This is the "exchange rate." Without a reliable supply of foreign exchange in each country, and without relatively stable exchange rates, world trade would drop drastically. You wouldn't be wearing tennis shoes made in Asia, or eating an apple grown in New Zealand.
The International Monetary Fund was founded over 50 years ago to allow currency to be exchanged freely and easily between member countries. Today, the IMF works to help member countries ensure that they always have enough foreign exchange to continue to do business with the rest of the world.
The following imaginary scenario attempts to picture what would happen if the IMF did not exist. It tells the story of a businessperson in a fictional developing country that is suffering from a shortage of foreign exchange. In the scenario, there is no IMF to turn to in order to resolve the currency crisis. You will soon come to realize the difficulties of carrying on international trade in that imaginary world without the IMF.
The Phone Dealer's Dilemma
You are a wireless phone dealer in the mythical land of Yak. Your country is large, but has a small population. Just about everyone has a cellular phone because there are no regular phone lines across the vast distances of your country. Naturally, people take a lot of interest in their phones. Your customers are looking for the latest new styles and features. Your business has great potential.
But you have a problem. You are a dealer. You sell phones, but you do not manufacture them. The best phones come from the neighboring countries of New Bells, Vox, and Sans Fil. To give your customers the selection they want, you realize you could import cell phones from these countries.
Pay Foreign Phone Exporters in Yak Doubloons
You contact cell phone exporters in New Bells, Vox, and Sans Fil. They are all eager to sell you their unique, high-quality phones. But none will take payment in doubloons, Yak's own money. They can't spend doubloons in their own countries. Your currency is worthless outside of Yak. Doubloons are therefore known as a "soft currency."
The exporters all tell you that you could pay them in shillings instead. The shilling is the currency of Zedland, another, more distant, country. Zedland's economy is so strong that its currency is trusted all over the world. Shillings are known as "hard currency" because they have value outside the country they come from.
Smoothing the bumps in the flow of foreign exchange
Before people from different countries can buy or sell anything to each other, they have to solve a basic problem. Buyers have to be able to change their money from their country's currency to the seller's national currency. This is called "foreign exchange." Each currency, whether it's the US dollar or the Haitian gourde, has a value in terms of other currencies. This is the "exchange rate." Without a reliable supply of foreign exchange in each country, and without relatively stable exchange rates, world trade would drop drastically. You wouldn't be wearing tennis shoes made in Asia, or eating an apple grown in New Zealand.
The International Monetary Fund was founded over 50 years ago to allow currency to be exchanged freely and easily between member countries. Today, the IMF works to help member countries ensure that they always have enough foreign exchange to continue to do business with the rest of the world.
The following imaginary scenario attempts to picture what would happen if the IMF did not exist. It tells the story of a businessperson in a fictional developing country that is suffering from a shortage of foreign exchange. In the scenario, there is no IMF to turn to in order to resolve the currency crisis. You will soon come to realize the difficulties of carrying on international trade in that imaginary world without the IMF.
The Phone Dealer's Dilemma
You are a wireless phone dealer in the mythical land of Yak. Your country is large, but has a small population. Just about everyone has a cellular phone because there are no regular phone lines across the vast distances of your country. Naturally, people take a lot of interest in their phones. Your customers are looking for the latest new styles and features. Your business has great potential.
But you have a problem. You are a dealer. You sell phones, but you do not manufacture them. The best phones come from the neighboring countries of New Bells, Vox, and Sans Fil. To give your customers the selection they want, you realize you could import cell phones from these countries.
Pay Foreign Phone Exporters in Yak Doubloons
You contact cell phone exporters in New Bells, Vox, and Sans Fil. They are all eager to sell you their unique, high-quality phones. But none will take payment in doubloons, Yak's own money. They can't spend doubloons in their own countries. Your currency is worthless outside of Yak. Doubloons are therefore known as a "soft currency."
The exporters all tell you that you could pay them in shillings instead. The shilling is the currency of Zedland, another, more distant, country. Zedland's economy is so strong that its currency is trusted all over the world. Shillings are known as "hard currency" because they have value outside the country they come from.