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International Finance > Chapter 2 > Flashcards

Chapter 2 Flashcards

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1
Q

Balance Of Payments

A

record of any payment or receipt between one nation and all other countries

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2
Q

BOP components

A

Current Account
Capital Account
Financial Account
Errors, Omissions, Reserves

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3
Q

BOP

A

summary of transactions between D&residents over spec. period of time
represents accounting of a country international transactions for a period (quarter, yearly)
it accounts for transactions of business, indv, government

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4
Q

Current Account

A 
summary of flow of funds due to purchase of g/S (balance of trade ex-imports)
provision of income (I/DP) on financial assets (securities) (Income Account)
Transfer Payment (aid, grants , gifts) from one country to the other
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5
Q

Financial Account

A

DFI
PI
Other capital investment
A measure of country´s LT &ST capital investments

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6
Q

Financial Account

DI

A

investment in fixed assets in foreign countries

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7
Q

Financial Account

PI

A

transactions involving LT financial assets (stocks, bonds) between countries
BUT DO NOT affect the transfer of control

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8
Q

Financial Account

other capital investment

A

transactions involving ST financial assets (MM securities)

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9
Q

Capital Account

A

summary of flows of fund resulting from
a)sales of assets
value of F.A by people who move to a diff. country
b) value of non-FA that are transferred across country borders (patent &trademarks)

the capital account items are relatively minor compared to the items of the financial account

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10
Q

Error, Omission, Reserves Accounts…

A

to balance
a) F &Capital Account
b) Current Account
measurements errors can occur when attempting to measure the value of funds transferred into to out of a country

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11
Q

Growth of International trade

A

increased substantially over time
MCN pay lower prices on materials, increase its sales and expand operations
1. events that increased trade volume (government make efforts to remove cross border restrictions)
2. Outsourcing
3. Trade volume amount countries
4. Trend in US Balance of Trade
5. Impact of huge deficit

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12
Q

Events that have increased Trade Volume

A

1.removal of Berliner Wall
(reduction in trade barriers in Eastern Europe)
2. Single European Act 1987
(improve access to suppliers from firms in other Eu C.)
3. NAFTA (penetrate product/labour markets prev. not accessible)
4. GATT (general agreement on tariffs and trade)
–> called for the reduction or elimination of trade restrictions on spec. imported goods over 10yr period across 117 countries
5. Inception of Euro (risk reduction)
6. Expansion of European union (reduce restriction of trade)

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13
Q

Outsourcing

1. definition

A

process of subcontracting to a 3rd in another country to provide supplies or services that were previously produced internally

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14
Q

Outsourcing

2. Impact of Outsourcing

A

increased international trade activity as MCN now purchases P&S for another country
lower cost of operations
job creation with low wages

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15
Q

Outsourcing

3. Criticism

A

might reduce jobs in the home country

reliable on others buying your products

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16
Q

Managerial Decisions about Outsourcing

A
  1. Managers of a U.S.-based MNC may argue that they create jobs for U.S. workers
  2. SH may suggest that the managers are not maximizing the MNC’s value as a result of their commitment to creating U.S. jobs
  3. should consider the potential savings that could occur as a result of outsourcing
  4. consider the possible bad publicity or bad morale that could occur among the U.S. workers
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17
Q

Trade volume between the United States and Other Countries

A
  1. About 20% of all U.S. exports are to Canada, while 13% are to Mexico
  2. Canada, China, Mexico, and Japan are the key exporters to the United Staes. Together, they are responsible for more than half of the value of all U.S. imports
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18
Q

Trend in U.S. Balance of Trade

A
  1. The U.S. balance of trade deficit increased substantially from 1997 until 2008
  2. In the 2008-2009 period, U.S. economic conditions weakened and the U.S. demand for foreign products and services decreased
  3. In recent years, the U.S. annual balance of trade deficit with Chine has exceeded $200 billion
  4. Any country’s balance of trade can change substantially over time
19
Q

Impact

balance of trade Deficit

A
  • Eroding industry base and weakening manufacturing strength
  • Mounting household debt
  • Private sector more heavily in debt should the government decide to reduce fiscal deficit
  • Weakening currency and rising inflation should the creditors withdraw
  • The creditors are not necessarily always friendly
20
Q

Advantage

Balance of Trade Deficit

A
  • Creates job in some industries
  • Lower prices due to increased competition and lower manufacturing cost gained through international business
  • More choices are offered
21
Q

A)Factors Affecting International Trade Flows

A
  1. Cost of Labor
  2. National Income
  3. Government Policy
  4. Inflation
  5. Exchange Rates
22
Q

Factors Affecting I. T.Flows

1. Cost of labour

A

C.A of low cost of labour

spec. on labour intensive industries

23
Q

Factors Affecting I. T.Flows

2. National Income

A

increase in national income relative to others

Current Account Decreases

24
Q

Factors Affecting I. T.Flows

3. Government Policies

A

Increase import through

  • restrictions on imports
  • subsidies for exporters
  • lack of restrictions on piracy
  • environmental restrictions
  • labour laws
  • tax braks
  • country security laws
25
Q

Factors Affecting I. T.Flows

4, Inflation

A

inflation increase relative to trade partner (other things being equal)
current account will decrease

26
Q

Factors Affecting I. T.Flows

5. Exchange Rates

A

currency appreciate relative to other currencies
current account decreases
but even if there is no explicit barriers the gov. would try to attempt to manipulate ER (or use it as an excuse) to a level that would effectively reduce foreign competition

27
Q

How exchange rates may correct a balance of trade deficit:

A

home exchange for foreign to buy foreign goods
home currency faces downward pressure
leading to increased in foreign demand fo the country´s products

28
Q

Why exchange rates may not correct a balance of trade deficit:

A

ER will not automatically correct any internal trade balances when other forces are at work

29
Q

Limitations of weak home currency

A

Competition
Impact of other currencies
Prearranged international Trade transactions
Intra-company trade

30
Q

Friction Regarding Echange Rates

A
  1. All governments cannot weaken their home currencies simultaneously
  2. Actions by one government to weaken its currency causes another country’s currency to strengthen
  3. Government attempts to influence exchange rates can lead to international disputes
31
Q

B)Factors affecting DFI

A
  1. change in restrictions (new opportunities)
  2. Privatisation (more stimulate to do DFI than stated)
  3. potential economic growth (more likely to attract DFI)
  4. Tax Rates (low rates)
  5. E.R (DFI in countries which local currency is expected to strength against own)
32
Q

C)Factors affecting

PI

A
  1. tax rate on Interest/Dividends low
  2. IR (money inflow in countries with high IR)
  3. ER (investors are attracted to currency expected to strength)
33
Q

D) Impact

International Capital Flows

A

US relies heavily on foreign investments
- US manufacturing plants, offices, other buildings
- debt securities issued by US firms
US Treasury debt securities
Foreign investors are attracted to US FM when their own IR are lower

34
Q

Agencies that Facilitate International Flows

A
  • International Monetary Fund (IMF)
  • World Bank (International Bank for Reconstruction and Development)
  • World Trade Organization WTO
  • International Financial Corporation (IFC)
  • International Development Association (IDA)
  • Bank of International Settlements (BIS)
  • Organization for Economic Cooperation and Development (OECD)
  • Regional Development Agencies
35
Q

Several agencies facilitate the international flow of funds by….

A
  • promoting international trade and finance,
    providing loans to enhance global economic development, settling trade disputes between countries, promoting global business relationships between countries
36
Q

Importance of Trade Balance

Trade Deficit

A

biggest part
trade deficit as a % of GDP = deficit is becoming unmanageable
investors&markets professionals appear more concerned with trade deficits than surplus as chronic deficits may be precursor to currency devaluations
BUT- might be necessary if economy is growing strongly and needs import to maintain the momentum

37
Q

Importance of Trade Balance

A

key indicator of nation´s health
relative strength of country´s economy
surplus countries lends money to deficit countries
debit = imports, foreign, aid, domestic spending/investment abroad
Credit = exports, foreign spending/investment in domestic economy
S/D –> depends on business cycle
e.g. recession = preferable to export more to create jobs &demand in economy
expansion = import more to promote price competition which limits inflation

38
Q

Differences in the Accounts

A 
CA = flow of Goods&Services
FA= in/decrease in intern. ownership assets
CA= capital expenditure &overall income of a country
39
Q

Direct vs

Portfolio/capital investments

A 
DI = expansion of firm´s foreign operations
P/CI = net flow of funds due to financial assets transactions between idv./inst. investors
40
Q

Trade Fictions

A

Int. Trade Policies decide of Market Share within each industry

  • -> this will affect unemployment, income level, eco. growth
  • -> gov,. would still impose quotas, tariffs to protect local products
41
Q

Trade Fictions

Debate

A

a) tariffs prevent free trade &give local firms unfair adv. in their own market
b) or use more subtle trade restrictions against foreign firms

42
Q

Policy of international trade

Advantage

A

encourages competition
highest quality &lowest cost to produce
shift production in those countries which are most efficiently
more exports can be facilitate through IT

43
Q

Policy of international trade

Disadvantages

A

job creation in one country is loss in another
disagreement on which type of strategy government should allowed
a) more subtle against foreign firms
b) tariffs/quotas to protect local firms

44
Q

Policy of International trade

Debates

A

Outsourcing
Should managers outsource to satisfy shareholder?
using E.R as policy

International Finance (9 decks)

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