4- International Flow Of Funds Flashcards
BOP
Show all transactions between one country and rest of world for given time period
Current account - Shows activities of consumers and businesses in economy with respect to trade balance, service balance, income balance, and net transfers
Financial account
Finances current account
consists of domestic country owned assets abroad, foreign-owned assets in domestic country and net financial derivatives
E.g. aus assets abroad, foreign assets in Aus, net financial derivatives
Risk premium
Added return required by investors for risk associated with security asset
FDI
Purchase of fixed assets abroad used in manufacture and sale of p+s abroad
Independent floating ER system
Major currency values determined by demand/supply of currencies
Managed floating ER
When currencies value depends partly on demand and supply in foreign-exchange market and partly on active government intervention in foreign exchange market
Fixed ER system
Country pegs currency at a fixed rate to a major currency/basket of currencies and the exchange rate fluctuates within a narrow margin around a central rate
Spot market
Trades currencies on a real-time basis for immediate delivery
Forward market
Enables purchases and sales of currencies in future with prices established at previous time
Security investment
Financial capital flows between countries in search of higher rate of return on foreign stocks and bonds. Central banks hold foreign exchange of major countries as part of the reserves in addition to the local currency. The security investments in for an outflow of funds the fact of a country’s BOP.
Longer term than FDI. in form of stocks and bonds.
International monetary system
Gold standard
Bretton woods agreement - USD pegged at fixed ER to gold, and currencies of other countries to USD.
IMF- established under Bretton woods agreement to help ensure stability of international monetary and financial system.
Development of flexible ER system
Smithsonian agreement - 1971 decision to allow US to devalue dollar against other countries currencies
Jamaica agreement - 1976 international monetary order allowing countries to adopt different ER systems including floating their currencies in world markets.
Valuing currencies
Special drawing right - basket of currencies ($, euro, pound, yen) created by IMF for use as a benchmark to value currencies of different countries.
Flexible ER system - market forces of d + s determining prices of different currencies
Law of one price
Principal stating that identical goods should sell for the same price in different countries according to local currencies
PPP
Basket of goods should have approximately the same price across countries
Big Mac index
