Two of the key supranational institutions, the International monetary Fund (IMF) and the World Bank, were established following a conference of leading countries held at Bretton Woods in the USA in 1944 to establish a post-war framework to facilitate currency and economic stability. The IMF now has nearly 200 member countries. Both organizations are centered in Washington. The objectives of the two organizations were always clearly delineated. The IMF was intended to provide relatively short-term financing to stabilize economies that had got into trouble with their foreign currency debts and reserves. The World Bank to provide long-term financing to support development.
Both organizations have their own agendas and this has led to significant controversy over their roles, objectives and policies. I will tr y to avoid being judgmental and simply describe what their principal objectives are and how they seek to achieve them. In this day and age it is usually safer to talk about sex than it is about politics. Most people are more interested in the former than the latter in any case.
The third key supranational financial institution is the Bank for International Settlements (BIS). This is based in Basel, Switzerland and its establishment predates that of the IMF and World Bank.
Posts Tagged ‘money’
Bretton Woods
Tuesday, October 20th, 2009Profits and losses
Saturday, August 29th, 2009Firms earn a profit when the revenues from the goods and services that they supply exceed the opportunity cost of the resources used to make them. Consumers will not buy goods and services unless they value them at least as much as their purchase price. For example, Susan would not be willing to pay $40 for a pair of jeans unless she valued them by at least that amount. At the same time, the seller’s opportunity cost of supplying a good will reflect the value consumers place on other goods that could have been produced with those same resources. This is true precisely because the seller has to bid those resources away from other producers wanting to use them.
Think about what it means when, for example, a firm is able to produce jeans at a cost of $30 per pair and sell them for $40, thereby reaping a profit of $10 per pair. The $30 opportunity cost of the jeans indicates that the resources used to produce the jeans could have been used to produce other items worth $30 to consumers (perhaps a denim backpack). In turn, the profit indicates that consumers value the jeans more than other goods that might have been produced with the resources used to supply the jeans.
The willingness of consumers to pay a price greater than a good’s opportunity cost indicates that they value the good more than other things that could have been produced with the same resources. Viewed from this perspective, profit is a reward earned by entrepreneurs who use resources to produce goods consumers value more highly than the other goods those resources could have produced. In essence, this profit is a signal that an entre- preneur has increased the value of the resources under his or her control.
Business decision makers will seek to undertake production of goods and services that will generate profit. However, things do ot always turn out as expected. Sometimes business firms are unable to cover their costs. ossw occur when the revenue derived from sales is insufficient to cover the opportunity cost of the resources used to produce a good or service. Losses indicate that the firm has reduced the value of the resources it has used. In other words, consumers would have been better off if those resources had been used to produce something else. In a market economy, losses will eventually cause firms to go out of business, and the resources they previously utilized will be directed toward other things valued more highly.
Profits and losses play a very important role in a market economy. They determine which products (and firms) will expand and survive, and which will contract and be driven from the market. Clearly, there is a positive side to business failures. As our preceding discussion highlights, losses and business failures free up resources being used unwisely so they can be put to a use producing other things that people value more highly.