ABSTRACT
This chapter considers how international finance is related to trade and to domestic macroeconomic policies, the realization that "everything is linked to everything else" can become overwhelming. It focuses on relatively simple concepts and models, starting with the difference between purchasing power parity and currency exchange rates. The chapter discusses central banks often participate in foreign exchange markets with policy goals in mind, buying or selling foreign currencies. Countries sometimes institute capital controls, which are restrictions or taxes on transactions in financial assets such as currency, stocks, or bonds, or on foreign ownership of domestic assets such as businesses or land. The chapter considers how international finance is related to trade and to domestic macroeconomic policies, the realization that "everything is linked to everything else" can become overwhelming. The Bretton Woods system of fixed exchange rates was only one aspect of the international financial structure established in the 1940s.
