Ch2-international Flow Of Funds.ppt

Chapter 2

International Flow of Funds

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Balance of Payments I.e. a summary of transactions between domestic and foreign residents for a specific country over a specified period of time.

BOP can be broken down into two most components:  Current Account  Capital Account 2

Current Account  A summary of the flow of funds between one specified country and all other countries due to purchases of goods or services, or the provision of income on financial assets

 The key components: 

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Payments for Merchandise and Services (Balance of Trade): the difference between export and import (deficit vs surplus) Factor Income Payments: income (interest and dividend payments) received by investors on foreign investments in financial assets (securities) Transfer Payments: aid, grants, and gifts from one country to another 3

Capital Account  A summary of the flow of funds resulting from the sale of assets between one specified country and all other countries over a specified period of time  The key components:   

Direct Foreign Investment: the investment in fixed assets in foreign countries that can be used to conduct business operations Portfolio Investment: transactions involving long-tern financial assets between countries that do not affect the transfer of control Other Capital investment: transactions involving short-term financial assets (such as money market securities) between countries

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International Trade Flow Factors  Impact of Inflation High local inflation will push consumers and corporation within the country likely to purchase more goods overseas and country’s export to others will decline.

 Impact of National Income If a country’s income level increases by a higher percentage than others’ current account will decrease.  Impact on Credit Crisis on Trade

 Impact of Government Policies   

Subsidies for Exporters Restrictions on Imports Lack of Restrictions on Piracy 5

International Trade Flow Factors (cont.)

 Impact of Exchange Rates The movements of currency’s value across countries are through the use of exchange rates.

 Interaction of Factors

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Correcting a Balance-of-Trade Deficit

Limitations of a Weak Home Currency Solution  Counterpricing by Competitors  Impact of Other Weak Currencies  Prearranged International Transactions

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International Capital Flows  Factors affecting DFI:     

Changes in Restrictions Privatization Potential Economic Growth Tax Rates Exchange Rates

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International Capital Flows (cont.)  Factors affecting international portfolio investment:  Tax Rates on Interest or Dividends  Interest Rates  Exchange Rates

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Agencies That Promote International Flows  International Monetary Fund (IMF) Major objectives:   

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promotes corporation among countries on international monetary issues promotes stability in exchange rates provides temporary funds to member countries attempting to correct imbalances of international payments promotes free mobility of capital funds across countries promotes free trade

World Bank = International Bank for Reconstruction and Development (IBRD) Objective: to make loans to countries in order to enhance economic development.

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Agencies That Promote International Flows (cont.) 

World Trade Organization (WTO) It is established to provide a forum for multilateral trade negotiations and to settle trade disputes related to the GATT accord.

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International Financial Corporation (IFC) Established to promote private enterprise within countries.

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International Development Association (IDA) Objective: to make loans for countries’ development – similar to world bank, but the qualification for loans is lower.

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Bank for International Settlements (BIS) It facilitates corporation among countries with regard to international transactions.

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Regional Development Agencies I.e. other agencies with more regional objectives relating to economic development, ex ADB, etc. 11