Lecture 4

Question 1

I = (Sh+Sg) + Sf

Answer 1

Domestic investment = Domestic savings + Foreign Savings

Question 2

I - (Sh + Sg) = Sf

Answer 2

Domestic Investment - Domestic Savings = Foreign Savings

Question 3

E + Sf = Z

Answer 3

Exports + Foreign Savings = Imports

Question 4

Sf = Z - E

Answer 4

Foreign Savings + Trade deficit

Question 5

I - (Sh + Sg) = Sf = Z - E

Answer 5

Domestic Investment - Domestic Savings = Foreign Savings = Trade deficit

Question 6

(Sh + Sg) - I = -Sf = E - Z

Answer 6

Domestic Savings - Domestic Investment = Foreign Investment = Trade Surplus

Question 7

Current Account

Answer 7

Transactions that create earnings and generate
expenditures between Country X and Rest of World
* Generally, goods and services (Trade Balance)+ Net income on assets + xfers
* But do not involve the exchange of assets, including loan

Question 8

Capital Account

Answer 8

Measures the funds that pay for goods and services.
Capital/Financial Account records exchanges that do involve the
exchange of assets
* Official Reserve: also involves transactions between countries, which involve assets, but these are governmental rather than private

Question 9

Balance of Payments Accounts

Answer 9

• These focus exclusively on the relationship of the country with the rest of the world
• Above, we had Firm, Household, Capital, Government, and Rest of World
• Now, we will look only at the details of the flows to the Rest of World, and we call this BOP accounting
• We divide the BOP accounts into 5 sub-account
• Current Account
• Capital/Financial Account
• Official Reserve Transactions
• Errors and Omissions
• Overall Balance

Question 10

Inward Transfers

Answer 10

Foreign aid, people sending money back to the country

Question 11

Outward transfers

Answer 11

Giving aid, giving money abroad, foreigners earning pensions living abroad

Question 12

Inward FDI

Answer 12

Adds to positive Cap/Fin Account

Question 13

Outward FDI

Answer 13

Adds to negative Cap/Fin account

Question 14

Portfolio investment

Answer 14

Investment in Gvt bonds, corporate Equities (stocks) and Corporate Bonds . No management influence

Question 15

Official Reserves Balance

Answer 15

Foreign securities and currency held by the central bank, to balance out the rest

Question 16

Foreign Direct Investment

Answer 16

Shares held in a foreign enterprise of at least 10 percent, indicating managerial influence

Question 17

Equity portfolio investment

Answer 17

Shares held in a foreign enterprise of less tha 10 percent, indicating indirect or portfolio interest rather than managerial influence

Question 18

Portfolio bond finance

Answer 18

The purchase of debt instruments in the form of either corperate (private debt) or government bonds (public debt)

Question 19

Commercial bank lending

Answer 19

Another form of debt but without a generally tradable asset

Question 20

Equity shares

Answer 20

You own part of a company. If the company increases in value, so do your shares
* But there is no obligation to pay back

Question 21

Bond instrument

Answer 21

You must be paid back; bond holders get first dibs if a company
goes bankrupt
* A bond is basically a form of loan, and interest is paid on the loan, as stipulated in the bond contract
* Bonds can be either private (usually corporate), or, public (governments)
* As we have seen, government bonds are how countries finance their spending, with short term cash gained from selling bonds; they then have to “finance” their debt by paying (hopefully low) payments on their total outstanding bonds

Question 22

Small net flow

Answer 22

Over the course of the year, very little money “permanently” entered or exited the country

Question 23

Gross Flow

Answer 23

Measure therefore shows how volatile and active a market is, which is a phenomenon which can be completely hidden by a small net capital flow figure—this can be a sign of risk

Question 24

Large gross flow besides the small net flow

Answer 24

This means that many investors swooped in, invested for a few hours or days, and then swooped out; or vice versa, a lot of capital left and then came back

Question 25

Push factors

Answer 25

Factors which ostensibly cause capital to leave origin countries. For example, global risk aversion is listed as a major push factor – * So, if risk aversion increases, then people do not want to invest in overseas equities investments or bonds – however, this will push more investment into FDI, since FDI is considered “safer” than these other things * But, if risk aversion decreases – i.e., if people are hungry to invest in equities, then they will invest less in FDI * This will lower FDI, and give less of a “push” to it * Other push factors include low interest rates at home, which encourages funds to look for greener pastures, and high growth at home, which results in more profits at home, and thus more capital to invest abroad

Question 26

Pull factors

Answer 26

Cause capital to invest in a certain country. * A Pull Factor should be seen from the point of view of the receiving country * You assume that a pull factor will make your country an attractive place for investment * Pull factors include high growth in your country, which will attract all types of investment including FDI * Another pull factor is that asset returns in your country are high, i.e. equity investments are doing well, and/or that interest rates are high * A third pull factor is country risk factors. If a government ensures that these are low (e.g. Singapore), then you will attract a lot of capital. However, if your government does things which investors don’t like (e.g. Turkey, and/or Venezuela), then most international investors will stay away, and FDI will suffe