International Finance Flashcards
Credits
Payments by foreigners
Debits
Payments to foreigners
2 BoP
- Current account
2. Balance of finance and capital
Current account balance=
Net exports + Net investment income + Net transfers
In a current account deficit the UK must…
borrow from foreign lenders or sell assets
Main 3 items in the Capital and financial account
- Direct investment-purchase/creation investment
- Portfolio investment- share/bond investment
- Short term capital flows- bank transfers
Surplus/Deficit on the C+F account means…
UK is borrowing more from the ROW than we are lending
UK is lending more than its borrowing from ROW
BoP must always be…
balanced
A BoP surplus means a country must…
Purchase foreign currency reserves
A BoP deficit means a country must…
Sell currency reserve
When is a current account deficit problematic?
When its used to fund consumption instead of investment
Export effect (on currency)
The lower the ER
The more exports sold
THe greater the £ demand
Expected profit effect
The lower the ER
The more potential profit from holding £ if it appreciating
The more £ demand
£ demand/ supply depends on 3 things…
- Exchange rate
- Expected exchange rate
- Interest rates
When demand for £ is low supply for £ is…
high due to;
The import effect
And the expected loss effect
