FINC 327 Chapter 2: BOP Flashcards
The balance of payments is
is a summary of transactions between domestic and foreign
residents for a specific country over a specified period of time.
current account
represents a summary of the flow of funds
between one specified country and all other countries due to purchases of goods and services
or to the cash flows generated by income-producing financial assets
capital account
sale of assets
between one specified country and all other countries over a specified period of time;
3 components of current acct
(1) merchandise (goods)
and services, (2) factor income, and (3) transfers.
balance of trade.
The difference between total exports and imports
J.C. Penney purchases stereos produced in Indonesia that it will sell in its U.S. retail stores.
Debit
Individuals in the United States purchase CDs over the Internet from a firm based in China.
Debit
The Mexican government pays a U.S. consulting firm for consulting services provided by the firm.
Credit
IBM headquarters in the United States purchases computer chips from Singapore that it uses in assembling computers.
Debit
A university bookstore in Ireland purchases textbooks
produced by a U.S. publishing company.
Credit
A U.S. investor receives a dividend payment from
a French firm in which she purchased stock.
Credit
The U.S. Treasury sends an interest payment to a German insurance company that purchased U.S. Treasury bonds one year ago.
Debit
A Mexican company that borrowed dollars from a bank based in the United States sends an interest payment to that bank.
Credit
The United States provides aid to Costa Rica in response to a flood in Costa Rica.
Debit
Switzerland provides a grant to U.S. scientists to work on cancer research.
Credit
Factors that affect international trade flows
■ cost of labor, ■ inflation, ■ national income, ■ credit conditions, ■ government policies, and ■ exchange rates.
If a country’s inflation rate increases relative to the countries with which it trades, then
its current account should decrease, other things being equal
If a country’s income level (national income) increases by a higher percentage than those
of other countries, then
its current account should decrease, other things being equal.
when Credit conditions tend to tighten, what happens to international trade?
decline in international trade flows
tariff
government imposes a tax on imported goods, consumers must pay more to purchase foreign goods
quota
a maximum limit that can be imported
If a country’s currency begins to rise in value against
other currencies then its current account balance
should decrease, other things being equal.
As the currency strengthens, goods exported by that country will become more expensive
to the importing countries and so the demand for such goods will decrease
Limitations of a Weak–Home Currency Solution
counterpricing from comps
there may be other weaker countries
stability of intra trade companies
BOP Equation
=0=current asset balance + capital acct bal + NOR balance
Direct Foreign Investment
a firm’s acquisition of a foreign company, its construction of a new manufacturing plant, or its expansion of an existing plant in a foreign country.
How Exchange Rates May Correct a Balance-of-Trade Deficit
A balance-of-trade deficit suggests that the country is spending more funds on foreign products than it is receiving from exports to foreign countries. This exchange of its currency (to buy foreign goods) in greater volume than the foreign demand for its currency could place downward pressure on the value of that currency.
Once the country’s home currency’s value declines in response to these forces, the result should be more foreign demand for its products.
International Monetary Fund (IMF)
(1) promote cooperation among countries on international monetary issues
(2) promote stability in exchange rates,
(3) provide temporary funds to member countries attempting to correct imbalances of international payments
(4) promote free mobility of capital funds across
countries
(5) promote free trade
It is clear from these objectives that the IMF’s goals encourage the increased internationalization of business.
World Bank
Its primary objective is to make loans to countries in order to reduce poverty and enhance economic development.
Its main source of funds is the sale of bonds and other debt instruments to private investors and governments.
World Trade Organization (WTO)
provide a forum for multilateral trade negotiations and to settle trade disputes related to the GATT.
International Financial Corporation
established to promote private enterprise within countries. Composed of a number of member nations, the IFC works to promote economic development through the private rather than the government sector. It not only provides loans to corporations but also purchases stock, thereby becoming part owner in some cases in addition to a creditor.
J- curve effect
The lag time between weakness in the dollar and increased non-U.S. demand for U.S. products has been estimated to be 18 months or even longer. The U.S. balance-of-trade deficit could deteriorate even
further in the short run when the dollar is weak because U.S. importers then need more dollars to pay for the imports they have contracted to purchase.
total US exports and income receipts =
the amount of USD demanded.
Total U.S imports and income payment
= the amount of USD supplied.
So if the current account balance is negative, then
we can say that more was demanded then supplied
Why Exchange Rates May Not Correct a Balance-of-Trade Deficit
because we are assuming with deficit no one will buy from you or need your currency but there may be financial inflow from buying securites
