International trade principles and applications

International Monetary Fund (IMF) serves as an important function that makes international trade less challenging. The IMF is a powerful international institution that works together with the World Bank to provide support and guidance to nations in all stages of economic progress.

The IMF is responsible for managing the global financial system and supplying loans to its member states to help alleviate financial problems. Agreement for its creation came at the United Nations Monetary and Financial Conference in 1944 and the organization came into existence in 1946.

The IMF, along with the Bank for International Settlements and the World Bank, defines the monetary policy shared almost all by countries that pursue capitalism as an economic strategy. In order to gain access to IMF loans, Bank for International Settlements agreements, and strategic World Bank development loans, a country must agree to terms determined by all three organizations.

International trade is a key element that enables nations, of all sizes, to strengthen their economic positions. Larger nations use international market to export their goods and services, while smaller nations use this international scale market to import products so they are able to produce more efficiently.

In order for any nation to achieve these goals, one major component must be in place. A nation must have the ability to value other nation's currency. In the past, many different ways have been used to do this, and most have failed. To date, there is no perfect way to precisely measure the true value of another country's currency.

The IMF is an effort to view each country's economic position, offer suggestions, and provide the fundamental economic security that is essential to a successful international economy. The INF, on a global level, recaps many of the domestic economic goals.

Basically, the monitors exchange rate policies of member countries, lends them foreign exchange resources to support their adjustment policies when they experience balance of payments difficulties, and provides them financial assistance through a special "compensatory financing facility" when they experience temporary shortfalls in commodity export earnings.

The IMF, using a fund pledged by the member nations, buys foreign currencies on application from its members for the purpose of discharging international indebtedness and stabilizing exchange rates. The IMF currency reserve units are called Special Drawing Rights (SDRs).

Between 1974 and 1980, the value of SDRs was based on the currencies of the world's 16 leading trading nations. Since 1980, this value has been reevaluated every five years, based on the currencies of the five largest exporting nations, which are currently France, Germany, Great Britain, Japan, and the United States.

To assist international trade and reduce inequities in exchange, the fund has limited power to set the par value of currencies. The IMF provides its members provided with technical assistance in performing monetary transactions. In 1995, the IMF moved to increase disclosure requirements of countries borrowing money and at the same time created an emergency bailout fund for countries in financial crisis.

The IMF was highly criticized in 1998 for aggravating the Asian financial crisis, through the fund's decision to require Asian nations to increase their interest rates to record levels. A board of governors leads the IMF, with one representative from each nation. The board of governors elects an executive board of some 20 representatives to conduct regular operations.