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Madura: International Financial Management Chapter 2
Madura: International Financial Management Chapter 2
Balance of Payments
Chapter
2 • The balance of payments is a
International Flow of Funds measurement of all transactions between
domestic and foreign residents over a
specified period of time.
• Each transaction is recorded as both a
credit and a debit, i.e. double-entry
bookkeeping.
• The transactions are presented in three
groups – a current account, a capital
account, and a financial account.
South-Western/Thomson Learning © 2003 B2 - 2
Components of Current
Balance of Payments
Account
• The current account summarizes the flow of
funds between one specified country and all • Merchandise exports and imports (Balance
other countries due to the purchases of of trade).
goods or services, the provision of income • Service exports and imports.
on financial assets, or unilateral current • Factor income (interest and dividend).
transfers (e.g. government grants and
pensions, private remittances).
• A current account deficit suggests a greater
outflow of funds from the specified country
for its current transactions.
B2 - 3 B2 - 4
Components of Financial
Balance of Payments
Account
• The financial account (which was called • Direct foreign investment resulting into
the capital account previously) change in control of business.
summarizes the flow of funds resulting • Portfolio investment (long term financial
from the sale of assets between one assets) without affecting control.
specified country and all other countries.
• Other capital investment (short term
financial assets).
B2 - 7 B2 - 8
B2 - 11 B2 - 12
B2 - 13 B2 - 14
Correcting
A Balance of Trade Deficit J-Curve Effect