Chapter 2 Flashcards
What is a balance of payment? What are the components?
A summary of transactions between domestic and foreign residents for a specific country over a specified time period.
- Current Account *Most important
- Financial Account
- Capital Account
What is the Current Account? Main Components/Subaccounts?
summary of flow of funds due to purchases of goods or services or the provision of income on financial assets.
Balance of trade in goods, services, primary income, and secondary income
Current Account Subaccounts (Primary/secondary income) power point
Balance of Primary Income = income from DFI and earned from foreign portfolio investments (employee pay, reinvestment earnings, interest, rent)
Balance of Secondary Income = taxes, social security, insurance premium and claim, foreign aid
What is the balance of trade? A Deficit?
Mechandise exports - imports
Deficit = exports < imports
What is the Financial Account?
refers to special types of investment, including DFI and portfolio investment.
DFI in US (pos), DFI US based other country (negative)
What is the Capital Account?
summary of flow of funds resulting from the sale of assets between one specified country and all other countries over a specified period of time
minor accounts
patents or trademarks
Factors Impacting International Trade Flows***
Cost of labor, inflation, national income, credit conditions, government policy
key historal events incr int trade
Current account __ if currency appreciates vs other
Decreases
exports more expensive
imports cheaper
lower exports, more imports = neg current account (def)
Exchange Rates impact on Trade
Strong dollar = cheaper imports (high), exports expensive (low) = deficit
Weak dollar = exports cheaper (high), imports more expensive (low) (could correct trade deficit)
J-Curve effect
effect of a weaker dollar on the U.S. trade balance in which the trade balance initially deteriorates; it improves only when U.S. and non-U.S. importers respond to the change in purchasing power that is caused by the weaker dollar.
How Floating Rate Help correct deficit
When a home currency is exchanged for a foreign currency to buy foreign goods, then the home currency faces downward pressure, leading to increased foreign demand for the country’s products.
increase demand in foreign currency = less demand in home currency = home currency may lose value/depreciate since more being sold (exchanged)
Cause Home country products cheaper to foreigners = to more exports
Limitations of Floating Rate Help correct deficit
Competition: Foreign companies may lower their prices to remain competitive.
Impact of other currencies: A country that has balance of trade deficit with many countries is not likely to solve all deficits simultaneously.
Prearranged international trade transactions: International transactions cannot be adjusted immediately. The lag is estimated to be 18 months or longer, leading to a J-curve effect. (Exhibit 2.6)
Intracompany trade: Many firms purchase products that are produced by their
subsidiaries. These transactions are not necessarily affected by currency
fluctuations.
Factors Impacting DFI
Changes in restrictions (remove barriers)
Privatization: policy allows for expansion of international business because foreign firms can acquire operations sold by national governments
Economic Growth
Tax Rates
Exchange Rates: choose country where currency expected to strengthen against own
International Capital Flows: Long term interest rate determined by fix it***
interaction b/w S/D of funds in US market
Domestic + US funds = lower rates
