Balance of payments

A summary of transactions between domestic and

foreign residents for a specific period of time
Two of the main components are :
1. Current account tracks cashflows between
countries due to purchases of goods or
services or provision of income on financial
assets
2. Capital account tracks cashflows resulting
from the sale of assets. (Foreign investments)

Current account
Payments for merchandise and services
the difference between total imports and
total exports is the balance of trade
Factor income payments interest and
dividends
Transfer payments Aid , grants and gifts

Capital Account
Includes the value of financial assets
moved across borders by people who
migrate

Financial Account
1. Direct foreign investment investment in fixed
assets in foreign countries that can be used to
conduct business
2. Portfolio investment Transactions involving
long term financial assets e.g. stocks and
bonds that do not transfer control
3. Other capital investment Transactions
involving short term financial assets i.e. money
market securities

Factors Affecting International Trade

Flows
Inflation imports will increase, exports will
decline as things have become more expensive
National Income Increased consumption of
goods lead to increase in imports
Government policies Tariffs, subsidies etc.
Exchange rates Currency strengthening will
lead to more expensive products and reduced
exports

Factors Affecting DFI

Changes in restrictions and removal of
barriers
Privatization Leading to foreign
acquisitions
Potential for economic growth
Tax rates
Exchange rates invest in countries where
the currency is expected to strengthen

Factors Affecting International

Portfolio investment
Tax rates on Interest or dividends
Interest rates
Exchange rates