Sign in to edit and save changes to this... v 7 International Flow of Funds South-Western/Thomson Leaming © 2006Balance of Payments — vik * The balance of payments is a summary of transactions between domestic and foreign residents for a specific country over a specified period of time. * Inflows of funds generate credits for the country’s balance, while outflows of funds generate debits. 2. 3Sign in to edit and save changes to this... v Current Account * Payments for Merchandise and Services: Represents exports and imports represent tangible products, such as computers and clothing, that are transported between countries. The difference between total exports and imports is referred to as the balance of trade. * Factor Income Payments: which represents income (interest and dividend payments) received by investors on foreign investments in financial assets (securities) * Transfer Payments: which represent aid, grants, and gifts from one country to another.Activity * Find out the current account balance of South Asian countries including Pakistan for last 20 years and report. * Prepare your analytical report on the collected data. 2- 7The U.S. Current Account in 2003 (in billions of $) (1) U.S. exports of goods + $712 + (2) U.S. exports of services + 292 + (3) U.S. income receipts + 275 = (4) Total U.S. exports & income receipts = $1,279 (5) U.S. imports of goods — $1,263 + (6) U.S. imports of services - 246 + (7) U.S. income payments - 259 = (8) Total U.S. imports & income payments = $1,768 (9) Net transfers by the U.S. = $68 (10) Current account balance = (4)—(8)-(9) - $557 Activity * Find out the current account balance of South Asian countries including Pakistan for last 20 years and report. * Prepare your analytical report on the collected data.Capital Account AY i * The capital account summarizes the flow of funds resulting from the sale of assets between one specified country and all other countries. * The key components of the capital account are direct foreign investment, portfolio investment, and other capital investment.Capital Account —j4—_ * Portfolio Investment Portfolio investment represents transactions involving long-term financial assets (such as stocks and bonds) between countries that do not affect the transfer of control. Example: Purchase of Heineken (Netherlands) stock by a U.S. investor is classified as portfolio investmentFactors Affecting International Trade Flows * Impact of Inflation x Arelative increase in a country's inflation rate will decrease its current account, as imports increase and exports decrease. * Impact of National Income » A relative increase in a country’s income level will decrease its current account, as imports increase. Edit Copy Share Factors Affecting International Trade Flows * Impact of Credit Crisis on Trade Due to credit crisis spending for imported products declined. MNCs cut back their plans to boost exports. International trade is commonly facilitated by letter of credits, which are issued by commercial banks of importers promising to make payment upon delivery.Factors Affecting International Trade Flows * Impact of Government Policies Such as ¢ Subsidies for Exporters * Restrictions on Imports * Lack of Restrictions on PiracyFactors Affecting International Trade Flows * Restrictions on Imports * If a country’s government imposes a tax on imported goods (often referred to as a tariff), the prices of foreign goods to consumers are effectively increased. * In addition to tariffs, a government can reduce its country’s imports by enforcing a quota, or a maximum limit that can be imported. 2.7Sign in to edit and save changes to this... v Factors Affecting International Trade Flows * Impact of Exchange Rates x If a country’s currency begins to rise in value, its current account balance will decrease as imports increase and exports decrease. © Weak currency is favorable for exports © Strong currency is favorable for imports Correcting » A Balance of Trade Deficit * By reconsidering the factors that affect the balance of trade, some common correction methods can be developed. * Afloating exchange rate system may correct a trade imbalance automatically since the trade imbalance will affect the demand and supply of the currencies involved.Why a Weak Home Currency Is Not a Perfect Solution * Counterpricing by competitors * Impact of other weak currencies * Stability of intracompany trade = Many firms purchase products that are produced by their subsidiaries. ¢ Prearranged international transactions x The lag time between a weaker U.S.$ and increased foreign demand has been estimated to be 18 months or longer. 2-3International Capital Flows, * One of the most important types of capital flows is direct foreign investment. Firms commonly attempt to engage in direct foreign investment so that they can reach additional consumers or can rely on low-cost labour.Sign in to edit and save changes to this... Factors Affecting DFI V * Changes in Restrictions 5 New opportunities may arise from the removal of government barriers. * Privatization » DFI has also been stimulated by the selling of government operations. * Potential Economic Growth x Countries that have higher potential for economic growth are more attractive.Factors Affecting DFI V * Tax Rates = Countries that impose relatively low tax rates on corporate earnings are more likely to attract DFI. * Exchange Rates x Firms typically prefer to invest in countries where the local currency is expected to strengthen against their own. Factors Affecting International Portfolio Investment * Tax Rates on Interest or Dividends x Investors will normally prefer countries where the tax rates are relatively low. * Interest Rates = Money tends to flow to countries with high interest rates. * Exchange Rates Foreign investors may be attracted if the local currency is expected to strengthen.Agencies that Facilitate International Flows * International Monetary Fund (IMF) s The IMF encourages internationalization of businesses through surveillance, and financial and technical assistance. « Its compensatory financing facility attempts to reduce the impact of export instability on country economies. x The IMF adopts a quota system, and its financing is measured in special drawing rights (SDRs). 2-4Agencies that Facilitate International Flows * World Bank « This International Bank for Reconstruction and Development makes loans to countries to enhance their economic development. « In particular, its Structural Adjustment Loans (SALs) are intended to enhance a country’s long-term economic growth. 4 Funds are spread through cofinancing agreements with official aid agencies, export credit agencies, and commercial banks. 2-3Agencies that Facilitate International Flows ¢ World Trade Organization = The WTO was established to provide a forum for multilateral trade negotiations and to settle trade disputes related to the GATT accord. * International Financial Corporation 5 The IFC promotes private enterprise within countries through loan provisions and stock purchases. 2. 5Agencies that Facilitate International Flows * Bank for International Settlements « The BIS is the “central banks’ central bank” and “lender of last resort.” * Regional development agencies x Inter-American Development Bank x Asian Development Bank x African Development Bank » European Bank for Reconstruction and Development. 2. 5Agencies that Facilitate International Flows * Bank for International Settlements » The BIS is the “central banks’ central bank” and “lender of last resort.” * Regional development agencies s Inter-American Development Bank 4 Asian Development Bank a African Development Bank » European Bank for Reconstruction and Development. 2-4Agencies that Facilitate International Flows * World Bank « This International Bank for Reconstruction and Development makes loans to countries to enhance their economic development. In particular, its Structural Adjustment Loans (SALs) are intended to enhance a country's long-term economic growth. 4 Funds are spread through cofinancing agreements with official aid agencies, export credit agencies, and commercial banks. 2-3Agencies that Facilitate International Flows * International Financial Corporation = The IFC promotes private enterprise within countries through loan provisions and stock purchases. * World Trade Organization a The WTO was established to provide a forum for multilateral trade negotiations and to settle trade disputes related to the GATT accord. 2-Note * See next Recording for further recorded lecture. 2. 6