Description
This is a presentation describes the key components of the balance of payments.
INTERNATIONAL FLOW OF FUNDS
AND THE BALANCE OF PAYMENTS
CHAPTER OBJECTIVES
? To explain the key components of the balance of
payments; and
? To explain how the international flow of funds is
influenced by economic factors and other factors.
BALANCE OF PAYMENTS
? The balance of payments is a 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 (Statistical Discrepancy, The Official Reserves
Account).
THE CURRENT ACCOUNT
? The current account summarizes the flow of funds
between one specified country and all other
countries due to the purchases of goods or
services, the provision of income on financial
assets, or unilateral current 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.
BALANCE OF TRADE
? The current account is commonly used to assess
the balance of trade, which is simply the difference
between merchandise exports and merchandise
imports.
SUMMARY OF U.S. INTERNATIONAL TRANSACTIONS
(CURRENT ACCOUNT)
Exports of goods and services and income receipts1418568
Goods, balance of payments basis 772210
Services 293492
Income receipts 352866
Imports of goods and services and income receipts
-1809099
Goods, balance of payments basis -1224417
Services -217024
Income payments -367658
Unilateral current transfers, net -54136
Balance on current account -444667
(For the Year of 2000 in Millions of Dollars)
THE CAPITAL ACCOUNT
? The new capital account (as defined in the 1993
System of National Accounts and the fifth edition of
IMF’s Balance of Payments Manual) is adopted by
the U.S. in 1999.
? It includes unilateral current transfers that are really
shifts in assets, not current income. E.g. debt
forgiveness, transfers by immigrants, the sale or
purchase of rights to natural resources or patents.
? Simply put, The capital account measures the
difference between a country’s sales of assets to
foreigners and the country’s purchases of foreign
assets.
STATISTICAL DISCREPANCY AND THE OFFICIAL
RESERVES ACCOUNT
? There’s going to be some omissions and
misreported transactions—so we use a ?plug? figure
to get things to balance. This is the Statistical
Discrepancy .
? Official reserves assets include gold, foreign
currencies, SDRs, reserve positions in the IMF.
THE BALANCE OF PAYMENTS IDENTITY
BCA + BKA + BRA = 0
where
BCA = balance on current account
BKA = balance on capital account
BRA = balance on the reserves account
Under a pure flexible exchange rate regime,
BCA + BKA = 0
BOP AND THE EXCHANGE RATE
(US BOP DATA)
Exchange rate $
Credits
Debits
Current Account
1
Exports
$1,167.6
1
2
Imports
($1,295.53
)
3
Unilateral Transfers
$6.13
($45.01)
Balance on Current Account
($166.80)
Capital Account
4
Direct Investment
$107.93
($119.44)
5
Portfolio Investment
$387.62
($79.28)
6
Other Investments
$194.95
($227.2)
Balance on Capital Account
$264.58
7
Statistical Discrepancies
($96.76)
Overall Balance
$1.02
Official Reserve Account
($1.02)
P S
D
BALANCE OF PAYMENTS
AND THE EXCHANGE RATE
Exchange rate $
Credits
Debits
Current Account
1
Exports
$1,167.6
1
2
Imports
($1,295.53
)
3
Unilateral Transfers
$6.13
($45.01)
Balance on Current Account
($166.80)
Capital Account
4
Direct Investment
$107.93
($119.44)
5
Portfolio Investment
$387.62
($79.28)
6
Other Investments
$194.95
($227.2)
Balance on Capital Account
$264.58
7
Statistical Discrepancies
($96.76)
Overall Balance
$1.02
Official Reserve Account
($1.02)
P S
D
As U.S. citizens import, they are supply dollars to the FOREX
market.
BALANCE OF PAYMENTS
AND THE EXCHANGE RATE
Exchange rate $
Credits
Debits
Current Account
1
Exports
$1,167.6
1
2
Imports
($1,295.53
)
3
Unilateral Transfers
$6.13
($45.01)
Balance on Current Account
($166.80)
Capital Account
4
Direct Investment
$107.93
($119.44)
5
Portfolio Investment
$387.62
($79.28)
6
Other Investments
$194.95
($227.2)
Balance on Capital Account
$264.58
7
Statistical Discrepancies
($96.76)
Overall Balance
$1.02
Official Reserve Account
($1.02)
P S
D
As U.S. citizens export, others demand dollars at the FOREX
market.
BALANCE OF PAYMENTS
AND THE EXCHANGE RATE
Exchange rate $
Credits
Debits
Current Account
1
Exports
$1,167.6
1
2
Imports
($1,295.53
)
3
Unilateral Transfers
$6.13
($45.01)
Balance on Current Account
($166.80)
Capital Account
4
Direct Investment
$107.93
($119.44)
5
Portfolio Investment
$387.62
($79.28)
6
Other Investments
$194.95
($227.2)
Balance on Capital Account
$264.58
7
Statistical Discrepancies
($96.76)
Overall Balance
$1.02
Official Reserve Account
($1.02)
P S
D
As U.S. citizens export, others demand dollars at the FOREX
market.
BALANCE OF PAYMENTS TRENDS
U.S. Balance of Payments Trends
-200
-150
-100
-50
0
50
100
150
200
1
9
8
2
1
9
8
4
1
9
8
6
1
9
8
8
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
Year
B
a
l
a
n
c
e
o
f
P
a
y
m
e
n
t
s
(
$
b
)
Current Account
Capital Account
BALANCE OF PAYMENTS TRENDS
Germany's Balance of Payments Trend
-80
-60
-40
-20
0
20
40
60
80
1
9
8
2
1
9
8
4
1
9
8
6
1
9
8
8
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
Year
B
a
l
a
n
c
e
o
f
P
a
y
m
e
n
t
s
(
$
b
)
Current Account
Capital Account
BALANCE OF PAYMENTS TRENDS
Japan's Balance of Payments Trend
-150
-100
-50
0
50
100
150
1
9
8
2
1
9
8
4
1
9
8
6
1
9
8
8
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
Year
B
a
l
a
n
c
e
o
f
P
a
y
m
e
n
t
s
(
$
b
)
Current Account
Capital Account
CORRECTING
A BALANCE OF TRADE DEFICIT
? By reconsidering the factors that affect the balance
of trade, some common correction methods can be
developed.
? For example, a floating exchange rate system may
correct a trade imbalance automatically since the
trade imbalance will affect the demand and supply
of the currencies involved.
CORRECTING
A BALANCE OF TRADE DEFICIT
? However, a weak home currency may not
necessarily improve a trade deficit.
? Foreign companies may lower their prices to maintain
their competitiveness.
? Some other currencies may weaken too.
? Many trade transactions are prearranged and cannot be
adjusted immediately. This is known as the J-curve
effect.
? The impact of exchange rate movements on
intracompany trade is limited.
J-CURVE EFFECT
U
.
S
.
T
r
a
d
e
B
a
l
a
n
c
e
0
Time
J Curve
INTERNATIONAL TRADE FLOWS
? Different countries rely on trade to different extents.
? The trade volume of European countries is typically
between 30 – 40% of their respective GDP, while
the trade volume of U.S. and Japan is typically
between 10 – 20% of their respective GDP.
? Nevertheless, the volume of trade has grown over
time for most countries.
FACTORS AFFECTING
INTERNATIONAL TRADE FLOWS
? Inflation
? A relative increase in a country’s inflation rate will decrease its current
account, as imports increase and exports decrease.
? National Income
? A relative increase in a country’s income level will decrease its current
account, as imports increase.
? Government Restrictions
? A government may reduce its country’s imports by imposing tariffs on
imported goods, or by enforcing a quota. Note that other countries may
retaliate by imposing their own trade restrictions.
? Sometimes though, trade restrictions may be imposed on certain
products for health and safety reasons.
? Exchange Rates
? If a country’s currency begins to rise in value, its current account balance
will decrease as imports increase and exports decrease.
? Note that the factors are interactive, such that their simultaneous
influence on the balance of trade is a complex one.
AGENCIES THAT FACILITATE
INTERNATIONAL FLOWS
International Monetary Fund (IMF)
? The IM F is an organization of 183 member countries.
Established in 1946, it aims
? to promote international monetary cooperation and exchange
stability;
? to foster economic growth and high levels of employment;
and
? to provide temporary financial assistance to help ease
imbalances of payments.
? Its operations involve surveillance, and financial and technical
assistance.
? In particular, its compensatory financing facility attempts
to reduce the impact of export instability on country
economies.
? The IM F uses a quota system, and its unit of account is
the SDR (special drawing right).
AGENCIES THAT FACILITATE
INTERNATIONAL FLOWS
World Bank Group
? Established in 1944, the Group assists
development with the primary focus of helping the
poorest people and the poorest countries.
? It has 183 member countries, and is composed of
five organizations - IBRD, IDA, IFC, MIGA and
ICSID.
AGENCIES THAT FACILITATE
INTERNATIONAL FLOWS
IBRD: International Bank for Reconstruction and
Development
? Better known as the World Bank, the IBRD provides
loans and development assistance to middle-income
countries and creditworthy poorer countries.
? In particular, its structural adjustment loans are intended
to enhance a country’s long-term economic growth.
? The IBRD is not a profit-maximizing organization.
Nevertheless, it has earned a net income every year
since 1948.
? It may spread its funds by entering into cofinancing
agreements with official aid agencies, export credit
agencies, as well as commercial banks.
AGENCIES THAT FACILITATE
INTERNATIONAL FLOWS
M IGA: Multilateral Investment Guarantee
Agency
? The MIGA was created in 1988 to promote FDI in
emerging economies, by
? offering political risk insurance to investors and lenders;
and
? helping developing countries attract and retain private
investment.
AGENCIES THAT FACILITATE
INTERNATIONAL FLOWS
ICSID: International Centre for Settlement of
Investment Disputes
? The ICSID was created in 1966 to facilitate the
settlement of investment disputes between
governments and foreign investors, thereby helping
to promote increased flows of international
investment.
AGENCIES THAT FACILITATE
INTERNATIONAL FLOWS
World Trade Organization (WTO)
? Created in 1995, the WTO is the successor to the
General Agreement on Tariffs and Trade (GATT).
? It deals with the global rules of trade between nations to
ensure that trade flows smoothly, predictably and freely.
? At the heart of the WTO's multilateral trading system are
its trade agreements
? Its functions include:
? administering WTO trade agreements;
? serving as a forum for trade negotiations;
? handling trade disputes;
? monitoring national trading policies;
? providing technical assistance and training for developing
countries; and
? cooperating with other international groups.
AGENCIES THAT FACILITATE
INTERNATIONAL FLOWS
Bank for International Settlements (BIS)
? Set up in 1930, the BIS is an international organization
that fosters cooperation among central banks and other
agencies in pursuit of monetary and financial stability.
? It is the ?central banks’ central bank? and ?lender of last
resort.?
? The BIS functions as:
? a forum for international monetary and financial cooperation;
? a bank for central banks;
? a center for monetary and economic research; and
? an agent or trustee in connection with international financial
operations
AGENCIES THAT FACILITATE
INTERNATIONAL FLOWS
Regional Development Agencies
? Agencies with more regional objectives relating to
economic development include
? the Inter-American Development Bank;
? the Asian Development Bank;
? the African Development Bank; and
? the European Bank for Reconstruction and
Development.
IMPACT OF INTERNATIONAL TRADE ON AN
MNC’S VALUE
( ) ( ) | |
( )
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¿
¦
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)
¦
¦
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¹
¦
¦
¹
¦
¦
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+
×
=
n
t
t
m
j
t j t j
k
1 =
1
, ,
1
ER E CF E
= Value
E (CF
j,t
) = expected cash flows in currency j to be received by
the U.S. parent at the end of period t
E (ER
j,t
) = expected exchange rate at which currency j can be
converted to dollars at the end of period t
k = weighted average cost of capital of the parent
Exchange Rate Movements
Inflation in Foreign Countries National Income in Foreign Countries
Trade Agreements
THANK YOU
doc_527530634.pptx
This is a presentation describes the key components of the balance of payments.
INTERNATIONAL FLOW OF FUNDS
AND THE BALANCE OF PAYMENTS
CHAPTER OBJECTIVES
? To explain the key components of the balance of
payments; and
? To explain how the international flow of funds is
influenced by economic factors and other factors.
BALANCE OF PAYMENTS
? The balance of payments is a 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 (Statistical Discrepancy, The Official Reserves
Account).
THE CURRENT ACCOUNT
? The current account summarizes the flow of funds
between one specified country and all other
countries due to the purchases of goods or
services, the provision of income on financial
assets, or unilateral current 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.
BALANCE OF TRADE
? The current account is commonly used to assess
the balance of trade, which is simply the difference
between merchandise exports and merchandise
imports.
SUMMARY OF U.S. INTERNATIONAL TRANSACTIONS
(CURRENT ACCOUNT)
Exports of goods and services and income receipts1418568
Goods, balance of payments basis 772210
Services 293492
Income receipts 352866
Imports of goods and services and income receipts
-1809099
Goods, balance of payments basis -1224417
Services -217024
Income payments -367658
Unilateral current transfers, net -54136
Balance on current account -444667
(For the Year of 2000 in Millions of Dollars)
THE CAPITAL ACCOUNT
? The new capital account (as defined in the 1993
System of National Accounts and the fifth edition of
IMF’s Balance of Payments Manual) is adopted by
the U.S. in 1999.
? It includes unilateral current transfers that are really
shifts in assets, not current income. E.g. debt
forgiveness, transfers by immigrants, the sale or
purchase of rights to natural resources or patents.
? Simply put, The capital account measures the
difference between a country’s sales of assets to
foreigners and the country’s purchases of foreign
assets.
STATISTICAL DISCREPANCY AND THE OFFICIAL
RESERVES ACCOUNT
? There’s going to be some omissions and
misreported transactions—so we use a ?plug? figure
to get things to balance. This is the Statistical
Discrepancy .
? Official reserves assets include gold, foreign
currencies, SDRs, reserve positions in the IMF.
THE BALANCE OF PAYMENTS IDENTITY
BCA + BKA + BRA = 0
where
BCA = balance on current account
BKA = balance on capital account
BRA = balance on the reserves account
Under a pure flexible exchange rate regime,
BCA + BKA = 0
BOP AND THE EXCHANGE RATE
(US BOP DATA)
Exchange rate $
Credits
Debits
Current Account
1
Exports
$1,167.6
1
2
Imports
($1,295.53
)
3
Unilateral Transfers
$6.13
($45.01)
Balance on Current Account
($166.80)
Capital Account
4
Direct Investment
$107.93
($119.44)
5
Portfolio Investment
$387.62
($79.28)
6
Other Investments
$194.95
($227.2)
Balance on Capital Account
$264.58
7
Statistical Discrepancies
($96.76)
Overall Balance
$1.02
Official Reserve Account
($1.02)
P S
D
BALANCE OF PAYMENTS
AND THE EXCHANGE RATE
Exchange rate $
Credits
Debits
Current Account
1
Exports
$1,167.6
1
2
Imports
($1,295.53
)
3
Unilateral Transfers
$6.13
($45.01)
Balance on Current Account
($166.80)
Capital Account
4
Direct Investment
$107.93
($119.44)
5
Portfolio Investment
$387.62
($79.28)
6
Other Investments
$194.95
($227.2)
Balance on Capital Account
$264.58
7
Statistical Discrepancies
($96.76)
Overall Balance
$1.02
Official Reserve Account
($1.02)
P S
D
As U.S. citizens import, they are supply dollars to the FOREX
market.
BALANCE OF PAYMENTS
AND THE EXCHANGE RATE
Exchange rate $
Credits
Debits
Current Account
1
Exports
$1,167.6
1
2
Imports
($1,295.53
)
3
Unilateral Transfers
$6.13
($45.01)
Balance on Current Account
($166.80)
Capital Account
4
Direct Investment
$107.93
($119.44)
5
Portfolio Investment
$387.62
($79.28)
6
Other Investments
$194.95
($227.2)
Balance on Capital Account
$264.58
7
Statistical Discrepancies
($96.76)
Overall Balance
$1.02
Official Reserve Account
($1.02)
P S
D
As U.S. citizens export, others demand dollars at the FOREX
market.
BALANCE OF PAYMENTS
AND THE EXCHANGE RATE
Exchange rate $
Credits
Debits
Current Account
1
Exports
$1,167.6
1
2
Imports
($1,295.53
)
3
Unilateral Transfers
$6.13
($45.01)
Balance on Current Account
($166.80)
Capital Account
4
Direct Investment
$107.93
($119.44)
5
Portfolio Investment
$387.62
($79.28)
6
Other Investments
$194.95
($227.2)
Balance on Capital Account
$264.58
7
Statistical Discrepancies
($96.76)
Overall Balance
$1.02
Official Reserve Account
($1.02)
P S
D
As U.S. citizens export, others demand dollars at the FOREX
market.
BALANCE OF PAYMENTS TRENDS
U.S. Balance of Payments Trends
-200
-150
-100
-50
0
50
100
150
200
1
9
8
2
1
9
8
4
1
9
8
6
1
9
8
8
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
Year
B
a
l
a
n
c
e
o
f
P
a
y
m
e
n
t
s
(
$
b
)
Current Account
Capital Account
BALANCE OF PAYMENTS TRENDS
Germany's Balance of Payments Trend
-80
-60
-40
-20
0
20
40
60
80
1
9
8
2
1
9
8
4
1
9
8
6
1
9
8
8
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
Year
B
a
l
a
n
c
e
o
f
P
a
y
m
e
n
t
s
(
$
b
)
Current Account
Capital Account
BALANCE OF PAYMENTS TRENDS
Japan's Balance of Payments Trend
-150
-100
-50
0
50
100
150
1
9
8
2
1
9
8
4
1
9
8
6
1
9
8
8
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
Year
B
a
l
a
n
c
e
o
f
P
a
y
m
e
n
t
s
(
$
b
)
Current Account
Capital Account
CORRECTING
A BALANCE OF TRADE DEFICIT
? By reconsidering the factors that affect the balance
of trade, some common correction methods can be
developed.
? For example, a floating exchange rate system may
correct a trade imbalance automatically since the
trade imbalance will affect the demand and supply
of the currencies involved.
CORRECTING
A BALANCE OF TRADE DEFICIT
? However, a weak home currency may not
necessarily improve a trade deficit.
? Foreign companies may lower their prices to maintain
their competitiveness.
? Some other currencies may weaken too.
? Many trade transactions are prearranged and cannot be
adjusted immediately. This is known as the J-curve
effect.
? The impact of exchange rate movements on
intracompany trade is limited.
J-CURVE EFFECT
U
.
S
.
T
r
a
d
e
B
a
l
a
n
c
e
0
Time
J Curve
INTERNATIONAL TRADE FLOWS
? Different countries rely on trade to different extents.
? The trade volume of European countries is typically
between 30 – 40% of their respective GDP, while
the trade volume of U.S. and Japan is typically
between 10 – 20% of their respective GDP.
? Nevertheless, the volume of trade has grown over
time for most countries.
FACTORS AFFECTING
INTERNATIONAL TRADE FLOWS
? Inflation
? A relative increase in a country’s inflation rate will decrease its current
account, as imports increase and exports decrease.
? National Income
? A relative increase in a country’s income level will decrease its current
account, as imports increase.
? Government Restrictions
? A government may reduce its country’s imports by imposing tariffs on
imported goods, or by enforcing a quota. Note that other countries may
retaliate by imposing their own trade restrictions.
? Sometimes though, trade restrictions may be imposed on certain
products for health and safety reasons.
? Exchange Rates
? If a country’s currency begins to rise in value, its current account balance
will decrease as imports increase and exports decrease.
? Note that the factors are interactive, such that their simultaneous
influence on the balance of trade is a complex one.
AGENCIES THAT FACILITATE
INTERNATIONAL FLOWS
International Monetary Fund (IMF)
? The IM F is an organization of 183 member countries.
Established in 1946, it aims
? to promote international monetary cooperation and exchange
stability;
? to foster economic growth and high levels of employment;
and
? to provide temporary financial assistance to help ease
imbalances of payments.
? Its operations involve surveillance, and financial and technical
assistance.
? In particular, its compensatory financing facility attempts
to reduce the impact of export instability on country
economies.
? The IM F uses a quota system, and its unit of account is
the SDR (special drawing right).
AGENCIES THAT FACILITATE
INTERNATIONAL FLOWS
World Bank Group
? Established in 1944, the Group assists
development with the primary focus of helping the
poorest people and the poorest countries.
? It has 183 member countries, and is composed of
five organizations - IBRD, IDA, IFC, MIGA and
ICSID.
AGENCIES THAT FACILITATE
INTERNATIONAL FLOWS
IBRD: International Bank for Reconstruction and
Development
? Better known as the World Bank, the IBRD provides
loans and development assistance to middle-income
countries and creditworthy poorer countries.
? In particular, its structural adjustment loans are intended
to enhance a country’s long-term economic growth.
? The IBRD is not a profit-maximizing organization.
Nevertheless, it has earned a net income every year
since 1948.
? It may spread its funds by entering into cofinancing
agreements with official aid agencies, export credit
agencies, as well as commercial banks.
AGENCIES THAT FACILITATE
INTERNATIONAL FLOWS
M IGA: Multilateral Investment Guarantee
Agency
? The MIGA was created in 1988 to promote FDI in
emerging economies, by
? offering political risk insurance to investors and lenders;
and
? helping developing countries attract and retain private
investment.
AGENCIES THAT FACILITATE
INTERNATIONAL FLOWS
ICSID: International Centre for Settlement of
Investment Disputes
? The ICSID was created in 1966 to facilitate the
settlement of investment disputes between
governments and foreign investors, thereby helping
to promote increased flows of international
investment.
AGENCIES THAT FACILITATE
INTERNATIONAL FLOWS
World Trade Organization (WTO)
? Created in 1995, the WTO is the successor to the
General Agreement on Tariffs and Trade (GATT).
? It deals with the global rules of trade between nations to
ensure that trade flows smoothly, predictably and freely.
? At the heart of the WTO's multilateral trading system are
its trade agreements
? Its functions include:
? administering WTO trade agreements;
? serving as a forum for trade negotiations;
? handling trade disputes;
? monitoring national trading policies;
? providing technical assistance and training for developing
countries; and
? cooperating with other international groups.
AGENCIES THAT FACILITATE
INTERNATIONAL FLOWS
Bank for International Settlements (BIS)
? Set up in 1930, the BIS is an international organization
that fosters cooperation among central banks and other
agencies in pursuit of monetary and financial stability.
? It is the ?central banks’ central bank? and ?lender of last
resort.?
? The BIS functions as:
? a forum for international monetary and financial cooperation;
? a bank for central banks;
? a center for monetary and economic research; and
? an agent or trustee in connection with international financial
operations
AGENCIES THAT FACILITATE
INTERNATIONAL FLOWS
Regional Development Agencies
? Agencies with more regional objectives relating to
economic development include
? the Inter-American Development Bank;
? the Asian Development Bank;
? the African Development Bank; and
? the European Bank for Reconstruction and
Development.
IMPACT OF INTERNATIONAL TRADE ON AN
MNC’S VALUE
( ) ( ) | |
( )
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=
n
t
t
m
j
t j t j
k
1 =
1
, ,
1
ER E CF E
= Value
E (CF
j,t
) = expected cash flows in currency j to be received by
the U.S. parent at the end of period t
E (ER
j,t
) = expected exchange rate at which currency j can be
converted to dollars at the end of period t
k = weighted average cost of capital of the parent
Exchange Rate Movements
Inflation in Foreign Countries National Income in Foreign Countries
Trade Agreements
THANK YOU
doc_527530634.pptx