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EAE 308: International Economics II Notes

Institution: Kenyatta University

Course: Bachelor of Economics

Content Category: Lecture Notes

Posted By: davidkariuki1010

Document Type: DOCX

Number of Pages: 256

Price: KES 200
 
    

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Summary

TABLE OF CONTENTS
Introduction to the course 4
Lesson one 5
1.0 Evolution of Money 5
Lesson Two 14
2.0 Markets for Currencies 14
Lesson Three 23
3.0 The Foreign Exchange Market 23
Lesson Four 37
4.0 The Link Between Foreign Exchange Markets and Financial Markets 37
Lesson Five 48
5.0 The Demand for and Supply of Foreign Exchange 48
Lesson Six 75
6.0 Balance of Payments 75
Lesson Seven 88
7.0 National Income Equilibrium in an Open Economy 88
Lesson Eight 112
8.0 The Money Market and National Income Analysis 112
Lesson Nine 132
9.0 The Balance of Payments Policy Instruments 132
Lesson Ten 143
10.0 The International Monetary System 143
Lesson Eleven 155
11.0 The Bretton Woods Institutions 155
Lesson Twelve 169
12.0 Regional Economic Integration 169
Bibliography 179
1. : EVOLUTION OF MONEY
1.1 Introduction
In this lesson we are going to look at the historic background of money, what constitutes
money, and its use in international trade. We shall also look at nominal and real prices.
1.2 Money and Its Use in International Trade.
• When specialization takes root as a mode of production in society, the logical sequel is to barter and trade the surplus of the specialized output with other products made by other people who have also specialized in their arts and trades.
• In an unsophisticated society with least exposure to outside influences, the barter system of trade is adequate to meet the exchange needs of society’s members.
• However, the barter system of exchange has limitations in the absence of what Stanley W. Jevons called a “double coincidence” of wants (Jevons, 1892).
• With the absence of a “double coincidence” of wants, each person must make a multiplicity of exchanges before acquiring the required goods and services.
• The problem encountered by lack of “double coincidence” of wants can be overcome when, through practice and custom, certain items of trade are accepted by the majority of participants in trade as intermediate items or medium of exchange.
• When this happens, these intermediate items or medium of exchange are called commodity money.
• In Kenya, cattle, camels, sheep and goats have played the role of commodity money from time immemorial to date.
• Each country in the world has at one time of its history used commodity money in its trade transactions (Einzig, 1966).
• However, for over 4000 years, the dominant intermediate item that has served as commodity money is a group of precious metals, mostly silver, gold and, to a lesser extent, copper. (Gary Smith, 1991)






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