International Trade and Investment Flashcards
Define the balance of payments
Summary of transactions between domestic and foreign residents for a specific country over a specified period of time (Usually a year)
It accounts for international transactions by businesses, individuals, and the government
Explain the current account of the BOP
Current Account: summary of flow of funds due to purchases of goods or services or the provision of income on financial assets. This is the largest section.
Explain the capital account of BOP
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.
Define the financial account of a BOP
Financial Account: refers to special types of investment, including DFI and portfolio investment. International trade and investment.
What is included in the current account of the BOP?
Payment for merchandise and services - tangible products and service exports and imports.
Factor income payments - income (interest or dividends) received by investors on foreign investments in financial assets
Transfer payments
Explain the Balance of trade
Difference between total exports and imports is the Balance of Trade. Surplus means exports> imports. Most countries run a trade deficit.
Explain the debit/credit consequences of Irish person investing in Asian bonds
For ireland that’s a credit of the BOP for Asian country thats a debit on their BOP.
What is included in the capital account
Includes the value of financial assets transferred across country borders by people who move to a different country.
Includes patents and trademarks
What is included in the financial account
DFI
Portfolio investment - Transactions involving long term financial assets between countries that do not affect the transfer of control.
Other capital investment - Transactions involving short-term financial assets between countries.
Errors and omissions and reserves - Measurement errors can occur when valuing funds transferred into or out of a country.
Define outsourcing
The process of subcontracting to a third party in another country to provide supplies or services that were previously produced internally.
What is the impact of outsourcing
Increased international trade activity as MNCs purchase products or services abroad.
Lower cost of operations and job creation in countries with low wages.
May reduce domestic jobs.
What is considered when making a decision on setting up subsidaries or outsourcing?
Managers of MNC may argue they create jobs for domestic workers.
Shareholders may be more in favour of outsourcing and argue the managers are not maximizing the MNC’s value.
Managers should consider the potential savings that could occur outsourcing.
Managers must also consider bad publicity or bad morale among domestic workers.
What are the factors affecting international trade flows?
Cost of labour - low labour costs gives advantage in labor intensive industry.
Inflation - Current account decreases if inflation increases relative to trade partners. This also affects interest rates, need higher rates to curb inflation.
National income - Current account decreases if national income increases relative to other countries.
Credit conditions - tighten if economy is weak
Government policy
Exchange rates
How can government policy increase exports
Restrictions on imports
Subsidies for exporters
Restrictions on piracy
Environmental restrictions
Labor laws
Business laws
Tax breaks
Country security laws
Trade requirements
Government ownership or subsidies
Policies to punish governments
Explain Dumping
Dumping occurs when a country or company exports a product at a price that is lower in the foreign importing market than the price in the exporter’s domestic market.
How can trade requirements be a tool governments use to help increase exports
Forms or obtaining licence are required because firms can export to the country (Bureaucracy)
How might exchange rates affect the current account?
Current account decreases if currency appreciates relative to other currencies.
When a home currency is exchanged for a foreign currency then the home currency faces downward pressure, leading to increased foreign demand for the country’s products - may correct the balance of trade deficit somewhat however other forces are at work so this will not be automatic.
Explain devaluation of pound vs revaluation
Devaluation - decrease in value of pound in relation to other currencies. Revaluation is increase in value of pound in relation to other currencies.
Explain price elastic
Price elastic means product demand is sensitive to price changes. Price elasticity of demand is the ratio of the percentage change in quantity demanded of a product to the percentage change in price.
What are the limitations of a weak home currency
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 cannot be adjusted immediately.
Explain the J curve effect
Prearranged international trade transactions cannot be adjusted immediately. The lag is estimated to be 18 months or longer, leading to a J-curve effect. This reflects that there us a time lag until any changes in rates are felt in real terms on Balance of Trade.
Explain intracompany trade
Many firms purchase products that are produced by their subsidiaries - not necessarily affected by currency fluctuations
Give some factors that affect DFI
Changes in restrictions - new opportunities with removal of government barriers
Privatisation -Managers of privately owned businesses are motivated to ensure profitability
Potential economic growth
Tax Rates
Exchange Rates
Give the factors that influence international portfolio management
Tax Rates on Interest or Dividends - Investors prefer where taxes are relatively low.
Interest Rates - Money tends to flow to countries with high interest rates, as long as the local currencies are not expected to weaken.
Exchange Rates - Investors are attracted to a currency that is expected to strengthen.
