BOP / FDI

Question 1

BOP

Answer 1

Balance of Payments:
accounts for countrys international transactions for a calendar year

includes:

• current account
• -> merchandise and services trade
• financial account
• -> resulting financial flows between nations

Question 2

BOP Accounting

Answer 2

Double entry system: Each positive (+) transaction has a balancing negative (-) transaction:

Positive Transaction current account (You receive money):

• Merchandise Export
• Service Export
• Income received through foreign investments etc

Negative Transactions current account (You spend money in foreign country)

• Merchandise Import
• Service Import
• FDI etc.

Question 3

US current account deficit

Answer 3

600 billion $

Question 4

Current account surplus/deficit

Answer 4

surplus: exports exceeds imports
deficit: import exceed exports

Question 5

Why surplus in long term not sustainable?

Answer 5

• problem of getting too rich
• value of currency will go up
• -> higher exchange rate
• -> limits nations ability to sustain exports bc imports for other countries are very expensive
• -> imports become less expensive

Question 6

Why deficit in long term not sustainable?

Answer 6

3 options when in deficit:

• finance (take dept)
• utilize savings
• sell overseas assets
• -> nation has to reserve money to pay back dept
• ->lower investments bc of slow economic growth and higher interest rates
• ->value of currency decreases and imports will get more expensive

Question 7

Trade deficit or surplus is worse?

Answer 7

Trade deficit:

• value of currency goes down
• worse competition in global market
• dept goes up; financial dependent

Question 8

Why can the US sustain trade deficit

Answer 8

• US $ central currency in the world,–> dollar value stays high
• US government never defaulted on its dept, other countries want to buy the US dept
• other countries want to sponsor the US dept because they do not want to loose such big market

Question 9

What happened to trade deficit in 2008-2009 (trade deficit cut in half)? see chart in slide

Answer 9

• global economy recession, less imports in the US, less consuming behaviour of US citizen
• it did not go back to where it was because of decreased oil prices; decreased imports in the US

Question 10

components of current account

Answer 10

• goods (main driver of deficit)
• services
• primary income (foreign earnings-domestic earnings)
• secondary income (gifts aids)

Question 11

FDI

Answer 11

Foreign direct investment
Conditions:
- 10% or more ownership
-for at least one year
-with intention to control

Question 12

Whats non managerial involvment?

Answer 12

portfolio investment

Question 13

Forms of FDI

Answer 13

• New Investment Greenfield
• joint ventures
• Mergers&Aquisitions:
• -> quick entry, local market know how, eliminate competitor, buying problems

Question 14

Horizontal/vertical FDI

Answer 14

Horizontal:
-same industry as the firm operates at home
Vertical:
forward: investment closer to the customer
backward: investment closer to the initial materials

Question 15

FDI Pros & Cons

Answer 15

-circumvents trade barriers
-keep up with competiton
-be closer to customer
-lobby work
but FDI is expensive and risky compared to just export

Question 16

Host country effect bc of FDI

Answer 16

• access to new products
• economical growth
• employment
• ressource transfer

Question 17

Home country effect

Answer 17

-adverse BOP current account effects
-positive employment effect
-economical grwoth
cost:
-BOP trade negativley effected
- loss of employment to overseas market