International Finance: Introduction

Introduction

In our discussion of foreign trade in International Trade, we left out one crucial element: How do buyers and sellers in different countries do business when they all use different currencies? When a giant bluefin tuna is packed in ice and flown from Cape Cod to Tokyo, the fishing boat captain wants to be paid in dollars. But the Japanese fishmonger has nothing but yen. That doesn't help the Cape Cod captain, who has to pay his crew and his bills in dollars. So the Japanese fishmonger must somehow pay for the tuna in dollars.

How are these problems resolved? What determines how many yen a dollar is worth? In other words, how does the foreign exchange system work?

This section answers these questions and explains the foreign exchange markets, balance of payments, International Monetary Fund, and what is meant by a “strong” and “weak” dollar.