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2nd Floor, SS Building

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WEEK 8 – 9

TOPIC 9: REGIONAL ECONOMIC INTEGRATION

UNIT LEARNING OUTCOME: At the end of the unit, you are expected to:
1. Understand regional economic integration
2. Identify the major regional economic areas of cooperation.

METALANGUAGE

Economic integration is an arrangement between nations that typically involves

reducing or eliminating barriers to trade and coordinating monetary and fiscal policies.
Economic integration aims to lower prices for consumers and suppliers and increase
cooperation between the countries covered by the agreement. Often economic
integration is referred to as regional integration, as is often the case among neighboring
nations.

Integrating the world and making sure products, services, and people pass across
borders easily. Members facilitate this trade through faster customs procedures, a more
favorable business climate behind the border, and alignment of regional regulations and
standards. APEC’s efforts to synchronize regulatory frameworks, for example, are a
crucial step toward integrating the Asia-Pacific economy; thus, a product can be more
easily exported with just one set of common standards across all economies.

Key Concepts and Terms

1. Free trade area. This is the most basic form of economic cooperation. Member
countries abolish all trade barriers within themselves but are free to
independently establish trade policies with non-member nations.
2. Customs union. This form of cooperation allows for economic cooperation as in
a free trade zone. Barriers to trade between member countries are being lifted.
3. Common market. This type allows member countries to create economically
integrated markets. Trade barriers will be abolished, as will any restrictions on

Course: CBM 321 – International Business and Trade

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labor and capital movement between member countries.

4. Economic union. This form comes about when countries sign an economic
agreement to eliminate trade barriers and follow common economic policies.

ESSENTIAL KNOWLEDGE

Topic 9.1: What is Regional Economic Integration?

Regional economic integration has allowed countries to focus on issues related to their
development stage and to promote trade between neighboring countries.

There are four main types of regional economic integration.

Free trade area. This is the most basic form of economic cooperation. Member
countries abolish all trade barriers within themselves but are free to independently
establish trade policies with non-member nations. An example is the North American
Free Trade Agreement (NAFTA).

Customs union. This form of cooperation allows for economic cooperation as in a free
trade zone. Barriers to trade between member countries are being lifted. The principal
difference from the free trade area is that members agree to treat trade similarly with
non-member countries.

Common market. This type allows member countries to create economically integrated
markets. Trade barriers will be abolished, as will any restrictions on labor and capital
movement between member countries. Like the customs unions, trade with non-
member nations has a common foreign policy. The primary benefits for workers are
that they no longer need a visa or work permit to work in a common market in another
member country. An example is the Common Market for Eastern and Southern Africa
(COMESA).

Course: CBM 321 – International Business and Trade

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 College of Business Administration Education
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Economic union. This form comes about when countries sign an economic agreement
to eliminate trade barriers and follow common economic policies. An example is the
European Union (E.U.).

These trading blocs have increased over the past decade, with more than one hundred
agreements in place and more in the discussion. A trade bloc is basically a free-trade
zone, or almost free-trade zone, created by one or more tax, tariff, and trade agreements
between two or more nations. Some trading blocs have resulted in agreements that
have created more substantive economic cooperation than others. Of course, there are
pros and cons to creating regional agreements.

To discuss further Regional Economic Integrations that includes;

Ø Advantages of Regional Economic Integration
Ø Disadvantages of Regional Economic Integration
Ø Major Areas of Regional Economic Integration and Cooperation
a. North America: NAFTA (Brief History and Purpose)
b. South America: MERCOSUR
c. CARICOM and Andean Community
d. CAFTA-DR
e. Europe: E.U. (Brief History and Purpose)
f. E.U. Governance
g. Asia: ASEAN
h. Asia: APEC
i. Middle East and Africa: GCC
j. Middle East and Africa: AEC

Go to: https://opentext.wsu.edu/cpim/chapter/2-4-regional-economic-integration/

Course: CBM 321 – International Business and Trade

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 College of Business Administration Education
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SELF HELP

Please refer to the articles below to further deepen your understanding in Regional
Economic Integration.
Read more:
https://fisherpub.sjfc.edu/cgi/viewcontent.cgi?article=1116&context=ur

https://www.giz.de/en/downloads/giz2016-en-
Presentation_Regional_Economic_Integration_-
_Theoretical_Concepts_and_Application_to_AEC.pdf

https://www.meti.go.jp/english/report/downloadfiles/gCT0015e.pdf

QUESTION AND ANSWER

Question/s: Answer/s:
1. 1.
2. 2.
3. 3.
4. 4.
5. 5.

KEYWORD INDEX

C E
Customs Union, p102 Economic Integration, 101
Common Union, p102 Economic Union, p103
Common Market, p102 F
Free Trade Area, p102

Course: CBM 321 – International Business and Trade

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 College of Business Administration Education
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TOPIC 10: FOREIGN EXCHANGE MARKET

UNIT LEARNING OUTCOME: At the end of the unit, you are expected to:
1. Understand concepts on the foreign exchange market
2. Identify the functions and role of the foreign exchange market for international
trade.

METALANGUAGE

Forex is a foreign-currency and trade portmanteau. For several purposes, typically for
trade, trading, or tourism, foreign exchange is converting one currency into another
currency. According to a new triennial study from Bank for International Settlements,
an average of more than $5.1 trillion in daily forex trading volume (a regional bank for
the national central bank).
Key Concepts and Terms
1. General Features of Foreign Exchange Market - The foreign exchange
market is defined as an OTC (Over the counter) market since there is no
physical place where participants meet to execute their deals.
2. Forex Market - The foreign exchange market is where currencies are traded.
To most people around the world, currencies are relevant, whether they
know it or not, since currencies need to be exchanged to conduct
international trade and commerce.
3. Functions of Foreign Exchange Market - The foreign currency market is
commonly known as Rorex, a global network that allows exchanges around
the world.

ESSENTIAL KNOWLEDGE

Topic 10.1: General Features of Foreign Exchange Market

The foreign exchange market is defined as an OTC (Over the counter) market since
there is no physical place where participants meet to execute their deals. This is more
an informal agreement between banks and brokers working in a buying and selling
currencies financing hub, linked to each other by telephone communications such as

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telex, mobile, and a satellite transmission network, SWIFT. The term foreign exchange
market refers to a segment of the market to the wholesale, where the transactions occur
among banks. The retail section applies to the transactions taking place between the
banks and their clients. The retail segment is located in a great number of locations.
These should be seen not as foreign exchange markets, but as the equivalents of those
markets.

What Is the Forex Market?

The foreign exchange market is where currencies are traded. To most people around the
world, currencies are relevant, whether they know it or not, since currencies need to be
exchanged to conduct international trade and commerce. If you live in the U.S. and want
to buy cheese from France, either you or the company you buy cheese from will have to
pay the French in euros (EUR) for the cheese. This means the U.S. importer will have to
swap the U.S. dollar (USD) equivalent value into euros. The same goes for traveling.

To further understand about the;

Ø A Brief History of Forex
Go to https://www.investopedia.com/articles/forex/11/why-trade-forex.asp

Currency as an Asset Class

There are two distinct features to currencies as an asset class:
Ø You can earn the interest rate differential between two currencies.
Ø You can profit from changes in the exchange rate.

By buying the currency with the higher interest rate and shortening the currency with
the lower interest rate, an investor can profit from the difference between two interest
rates in two different economies. Before the financial crisis of 2008, shortening the
Japanese yen (JPY) and buying British pounds (GBP) was very common, since the
interest rate gap was very small. This strategy is sometimes referred to as a "carry
trade."

Course: CBM 321 – International Business and Trade

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Functions of Foreign Exchange Market

The foreign currency market is commonly known as Rorex, a global network that allows
exchanges around the world.

To further understand about

Ø Transfer Function
Ø Credit Function
Ø Hedging Function
Go to https://businessjargons.com/functions-of-foreign-exchange-market.html

SELF HELP

Please refer to the articles below to further deepen your understanding of the Foreign
exchange market.
Read more: https://www.bauer.uh.edu/rsusmel/7386/ln1.pdf

http://thuvienso.bvu.edu.vn/bitstream/TVDHBRVT/15304/1/Forei
gn-Exchange-Market-An-Introduction.pdf

http://www.pondiuni.edu.in/storage/dde/downloads/ibiv_forex.pdf

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LET’S CHECK

Congratulations! You just finished the most vital concept in the study of international
business and trade. Let us check your understanding of the important concept. Please
proceed to the multiple-choice. Select the letter that best describes your answer.
1. The exchange rate is;
a. the price of one currency relative to gold.
b. the value of a currency relative to inflation.
c. the change in the value of money over time.
d. the price of one currency relative to another.
2. Exchange rates are determined in;
a. the money market.
b. the foreign exchange market.
c. the stock market.
d. the capital market.
3. Although market trades are said to involve the buying and selling of currencies,
most trades involve the buying and selling of;
a. bank deposits denominated in different currencies.
b. SDRs.
c. gold.
d. ECUs.
4. When the value of the British pound changes from $1.25 to $1.50, then
a. The pound has appreciated, and the dollar has appreciated.
b. The pound has depreciated, and the dollar has appreciated.
c. The pound has appreciated, and the dollar has depreciated.
d. The pound has depreciated, and the dollar has depreciated.
5. When the value of the British pound changes from $1.50 to $1.25, then
a. The pound has appreciated, and the dollar has appreciated.
b. The pound has depreciated, and the dollar has appreciated.
c. The pound has appreciated, and the dollar has depreciated.
d. The pound has depreciated, and the dollar has depreciated.

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6. When the value of the dollar changes from 0.5 pounds to 0.75 pounds, then
a. The pound has appreciated, and the dollar has appreciated.
b. The pound has depreciated, and the dollar has appreciated.
c. The pound has appreciated, and the dollar has depreciated.
d. The pound has depreciated, and the dollar has depreciated.
7. When the value of the dollar changes from 0.75 pounds to 0.5 pounds, then
a. The pound has appreciated, and the dollar has appreciated.
b. The pound has depreciated, and the dollar has appreciated.
c. The pound has appreciated, and the dollar has depreciated.
d. The pound has depreciated, and the dollar has depreciated.
8. When the exchange rate for the Mexican peso changes from 9 pesos to the dollar
to 10 pesos to the dollar, then
a. The peso has appreciated, and the dollar has appreciated.
b. The peso has depreciated, and the dollar has appreciated.
c. The peso has appreciated, and the dollar has depreciated.
d. The peso has depreciated, and the dollar has depreciated.
9. When the exchange rate for the Mexican peso changes from 10 pesos to the
dollar to 9 pesos to the dollar, then
a. The peso has appreciated, and the dollar has appreciated.
b. The peso has depreciated, and the dollar has appreciated.
c. The peso has appreciated, and the dollar has depreciated.
d. The peso has depreciated, and the dollar has depreciated.
10. In April 2000, one U.S. dollar traded on the foreign exchange market for about
7.2 French francs. Therefore, one French franc would have purchased about
a. 4.10 U.S. dollars. c. 0.41 U.S. dollars.
b. 1.40 U.S. dollars. d. 0.14 U.S. dollars.
11. In April 2000, one U.S. dollar traded on the foreign exchange market for about 44
Indian rupees. Thus, one Indian rupee would have purchased about
a. 0.01 U.S. dollars. c. 0.20 U.S. dollars.
b. 0.02 U.S. dollars. d. 2.00 U.S. dollars.
12. In April 2000, one U.S. dollar traded on the foreign exchange market for about
180 Spanish pesetas. Therefore, one Spanish peseta would have purchased about

Course: CBM 321 – International Business and Trade

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a. 0.005 U.S. dollars. c. 0.50 U.S. dollars.

b. 0.05 U.S. dollars. d. 5.00 U.S. dollars
13. In April 2000, one U.S. dollar traded on the foreign exchange market for about
1.47 Canadian dollars. Therefore, one Canadian dollar would have purchased
about
a. 2.30 U.S. dollars. c. 0.67 U.S. dollars.
b. 1.15 U.S. dollars. d. 0.56 U.S. dollars.
14. At the beginning of 1980, the French franc was valued at 25 cents and in early
1988 it was valued at 17.5 cents. Thus, from 1980 to 1988, the dollar _____ and
the franc _____.
a. appreciated; appreciated c. depreciated; depreciated
b. appreciated; depreciated d. depreciated; appreciated
15. f the dollar _____ from 1.0 European euros per dollar to 0.9 euros per dollar, the
euro _____ from 1.0 dollar to 1.1 dollars per euro.
a. appreciates; appreciates c. depreciates; depreciates
b. appreciates; depreciates d. depreciates; appreciates
16. If the dollar _____ from 5 Mexican pesos per dollar to 10 pesos per dollar, the peso
_____ from 20 cents to 10 cents per peso.
a. appreciates; appreciates c. depreciates; depreciates
b. appreciates; depreciates d. depreciates; appreciates
17. f the dollar appreciates from 5 French francs per dollar to 10 francs per dollar,
the franc depreciates from _____ cents to _____ cents per franc.
a. 20; 10 c. 10; 25
b. 10; 20 d. 20; 25
18. If the British pound appreciates from $0.50 to $0.75 per U.S. dollar, the dollar
depreciates from _____ to _____ pounds per dollar.
a. 2; 2.5 c. 2; 1.5
b. 2; 1.33 d. 2; 1.25
19. If the Japanese yen appreciates from one cent to two cents per yen, the dollar
depreciates from _____ to _____ yen per dollar.
a. 100; 50 c. 5; 10
b. 10; 5 d. 50; 100

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20. If the dollar appreciates from 1.5 Brazilian reals per dollar to 2.0 reals per dollar,
the real depreciates from _____ to _____ dollars per real.
a. $0.67; $0.50 c. $0.75; $0.50
b. $0.33; $0.50 d. $0.50; $0.67

QUESTION AND ANSWER

Question/s: Answer/s:
1. 1.
2. 2.
3. 3.
4. 4.
5. 5.

KEYWORD INDEX

B F
Buying Currencies, p106 Foreign Exchange Market, p105
C I
Currencies, p106 International Trade, p106
E Interest Rate, p106
Exchange Rate, p107

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TOPIC 11: INTERNATIONAL MONETARY SYSTEM

UNIT LEARNING OUTCOME: At the end of the unit, you are expected to:
1. Understand the role and purpose of the international monetary system.
2. Describe the purpose of the gold standard and why it collapsed.
3. Describe the Bretton Woods Agreement and why it collapsed.
4. Understand today’s current monetary system, which developed after the
Bretton Woods Agreement collapse.

METALANGUAGE

Why do economies need money? This chapter describes money as a unit of account used
in transactions as a medium of exchange. Without money, it will be harder for
individuals and businesses to get (purchase) or trade (sell) what they need, want or
produce. Money is offering us a widely agreed means of trade.

The international monetary system refers to the financial sector operating structure,
which consists of financial institutions, multinational companies, and investors. The
international monetary system establishes the institutional basis for international trade
laws and procedures, exchange rate determination, and capital movement.

Key Concepts and Terms

1. Fixed Exchange Rates - Fixed exchange rates are also sometimes called pegged
rates. One of the key factors contributing to the collapse of the gold standard was
that after the United Kingdom abandoned its pledge to preserve the value of the
British pound, countries decided to peg their currencies to the U.S. dollar.
2. National Flexibility – To allow countries to handle temporary but severe
downturns, the Bretton Woods Agreement provided from more than 10 percent
currency devaluation if required.
3. Today’s Exchange Rate System – Although there is no official replacement to the
Bretton Woods system, provisions are in place through ongoing G20 forum
discussions. Today's economy remains primarily a controlled float regime, with
the U.S. dollar and the euro jostling as the world's premier currency.

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4. Persian daric – The daric was a gold coin used in Persia from 522 BC until 330
BC.
5. Roman currency – During the Ramon Empire, currencies such as the aureus
(gold), denarius (silver), sestertius (bronze), dupondius (bronze), and as
(copper) were used from around 250 BC until 250 AD.
6. Thaler – Between about 1486 to 1908, in Europe, the thaler and its variants
were used as the standard by which currencies of the different states could be
measured.
7. Spanish American pesos – The predecessor of the thaler was widely used in
Europe, the Americas, and the Far East from 1500 to the early nineteenth
century; it was the first world currency.
8. British pound – The origins of the pound date back as early as around 800 AD,
but its influence grew in the 1600s as the unofficial gold standard; from 1816 to
about 1939, the pound was the global reserve currency until the gold standard
collapsed.
9. U.S. dollar – The Coinage Act of 1792 laid down the dollar as the basis for a
monetary account and, two years later, it went into circulations as a silver coin.
In the 1800s, its role as a global reserve currency grew and continues today.
10. Euro – Officially in circulation on January 1, 1999, the euro continues to serve as
currency in many European countries.

ESSENTIAL KNOWLEDGE

Topic 11.1: What is the International Monetary System?

Once the new monetary system can be fully understood, it is important to look back at
history and see how money and money-use-control schemes have evolved. Thousands
of years ago, if anyone wanted to get something, they had to barter, which worked well
if the two people wanted what one had, and even today, bartering still exists.

History reveals that ancient Egypt and Mesopotamia, which includes the land between
the Euphrates and the Tigris Rivers and is modern Iraq, parts of eastern Syria,
southwestern Iran and southeastern Turkey started to use a system based on highly

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prized gold and silver coins, also known as bullion, which is the purest type of precious
metal. But bartering remained the most popular form of trade and exchange.

Gold and silver coins slowly emerged when selling, although the amount of pure gold
and silver content affected the value of the coins. Only coins composed of pure precious
metal are bullions; all other coins are simply referred to as coins. It’s fascinating to note
that gold and silver as the basis of economic measure for several decades, and even into
the fairly recent past of the gold standard, which we will discuss in the next section.

Fast-forward two thousand years and a money-based system have long replaced the
bartering system. Over the past century alone, though, there have been changes in how
the monetary system has developed internationally from using gold and silver to reflect
the existing system’s national wealth and economic trade.

To read more about the following topics;

Ø Pre-World War I
Ø The Advantages of the Gold Standard
Ø The collapse of the Gold Standard
Ø Post – World War II
Ø Bretton Woods
Ø Fixed Exchange Rates
Ø National Flexibility
Ø Creation of the International Monetary Fund and the World Bank
Ø The collapse of Bretton Woods
Ø Post–Bretton Woods Systems and Subsequent Exchange Rate Efforts
Ø Jamaica Agreement
Ø The Gs Begin
Ø Today’s Exchange Rate System

Go to https://saylordotorg.github.io/text_international-business/s10-01-what-is-the-
international-mone.html

Course: CBM 321 – International Business and Trade

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SELF HELP

Please refer to the articles below to further deepen your understanding in the
International monetary system.
Read more: https://core.ac.uk/download/pdf/6899758.pdf

https://www.federalreservehistory.org/essays/bretton_woods_cr
eated

https://voxeu.org/article/operation-and-demise-bretton-woods-
system

https://www.piie.com/commentary/speeches-
papers/international-monetary-system-facing-challenge-
globalization

https://www.oxfordscholarship.com/view/10.1093/oso/97801987
18116.001.0001/oso-9780198718116-chapter-1

LET’S CHECK

Congratulations! You just finished the most vital concept in the study of international
business and trade. Let us check your understanding of the important concept. Please
proceed to the multiple-choice. Select the letter that best describes your answer.
1. The international monetary system can be defined as the institutional
framework within which of the following?
a. International payments are made
b. Movement of capital is accommodated
c. Exchange rate among currencies are determined
d. All of the above
2. Corporations today are operating in an environment in which exchange rate
changes may adversely affect their competitive positions in the marketplace.
This situation, in turn, makes it necessary for many firms to.
a. Carefully manage their exchange risk exposure

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b. Carefully measure their exchange risk exposure

c. Both a and b
d. None of the above
3. The international monetary system went through several distinct stages of
evolution. These stages are summarized, in alphabetic order, as follows:
I. Bimetallism IV. Flexible Exchange Rate Regime
II. Bretton Woods System V. Interwar Period
III. Classical Gold Standard
The chronological order that they actually occurred is;
a. III, I, IV, II and V c. VI, I, III, II and V
b. I, III, V, II and IV d. V, II, I, III and IV
4. In the United States, Bimetallism was adopted by the Coinage Act of 1792 and
remained a legal standard until 1873,
a. When Congress dropped the silver dollar from the list of coins to be
minted
b. When Congress dropped the twenty-dollar gold piece from the list of
coins to be minted
c. When gold from the California gold rush drove silver out of circulation
d. When gold from the California gold rush drove gold out of circulation.
5. The monetary system of bimetallism is unstable. Due to the Fluctuation of the
commercial value of the metals,
a. The metal with a commercial value lower than the currency value tends to
be used as metal and is withdrawn from circulation as money (Gresham’s
Law)
b. The metal with a commercial value higher than the currency value tends
to be used as money (Gresham’s Law)
c. The metal with a commercial value higher than currency value tends to be
used as metal and is withdrawn from circulation as money (Gresham’s
Law)
d. None of the above
6. In the 1850s the French franc was valued by both gold and silver, under the
official French ratio which equated a gold franc to a silver franc 15 and ½

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times as heavy. At the same time, the gold from newly discovered mines is
California poured into the market, depressing the value of gold as a result,
a. The franc effectively become a silver currency
b. The franc effectively become a gold currency
c. Silver become overvalued under the French official ratio
d. Both a and c
7. Suppose that the United States is on a bimetallic standard at $30 to one ounce
of gold and $2 for one ounce of silver. If new silver mines open and flood the
market with silver;
a. Only the silver currency will circulate
b. Only the gold currency will circulate
c. No change will take place since citizens could exchange their gold
currency for silver currency at any time.
d. None of the above
8. Prior to the 1870s, both gold and silver were used as international means of
payment and the exchange rates among currencies were determined by
either their gold or silver contents. Suppose that the dollar was pegged to
gold at $30 per ounce, the French franc is pegged to gold at 90 francs per
ounce and to silver at 9 francs per ounce of silver, and the German mark
pegged to silver at 1 mark per ounce of silver. What would the exchange rate
between the U.S. dollar and German mark be under this system?
a. 1 German mark = $2 c. 1 German mark = $3
b. 1 German mark = $0.50 d. 1 German mark = $1
9. Suppose that country A and country B are both on a bimetallic standard. In
country A the ratio is 15 to one (i.e. an ounce of gold is worth 15 times as
much as an ounce of silver in that currency), while in country B the ratio is
ten to one. If the free flow of capital is allowed between countries A and B is
this sustainable framework?
a. Yes b. No c. Maybe d. No enough
information
10. The United States adopted the gold standard in
a. 1776 b. 1879 c. 1864 d. 1973

Course: CBM 321 – International Business and Trade

Prepared by: Jesson Rey F. Sabado
Reviewed by: CMC Page 17 of 19
 College of Business Administration Education
2nd Floor, SS Building
Bolton Street, Davao City
Telefax: (082)227-5456 Local 131

QUESTION AND ANSWER

Question/s: Answer/s:
1. 1.
2. 2.
3. 3.
4. 4.
5. 5.

KEYWORD INDEX

B M
Barter, p113 Monetary System, p113
British Pound, p113 N
Bullions, p114 National Flexibility, p112
E P
Euro, p113 Persian Daric, p113
F R
Fixed Exchange Rate, p112 Roman Currency, p113
G S
Gold, p114 Spanish American Pesos, p113
Gold Standard, p114 Silver, p114
I T
International Monetary System, p113 Thaler, p113

Course: CBM 321 – International Business and Trade

Prepared by: Jesson Rey F. Sabado
Reviewed by: CMC Page 18 of 19
 College of Business Administration Education
2nd Floor, SS Building
Bolton Street, Davao City
Telefax: (082)227-5456 Local 131

Course prepared by:

JESSON REY F. SABADO, MBA

Name of Course Facilitator/Faculty

Course reviewed by:

CLAUDIO A. BISARES, MSE

Name of Program Head

Approved by:

JESTITA F. GURREA, BDM

Name of Assistant Dean

VICENTE SALVADOR E. MONTAÑO, DBA

Name of Dean

Course: CBM 321 – International Business and Trade

Prepared by: Jesson Rey F. Sabado
Reviewed by: CMC Page 19 of 19