Chapter 2 International Flow of Funds Jeff Madura,

Transcript:Chapter 2 International Flow of Funds Jeff Madura,:
Chapter 2 International Flow of Funds Jeff Madura, International Financial Management, 14th Edition. © 2021 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Chapter Objectives Explain the key components of the balance of payments. Explain the growth in international trade activity over time. Explain how international trade flows are influenced by economic and other factors. Explain how international capital flows are influenced by country characteristics. Introduce the agencies that facilitate the international flow of funds. 2 Balance of Payments (1 of 6) Definition: Summary of transactions between domestic and foreign residents for a specific country over a specified period of time. 3 Balance of Payments (2 of 6) Components of the Balance of Payments Statement: Current Account: summary of flow of funds due to purchases of goods or services or the provision of income on financial assets. Capital Account: summary of flow of funds resulting from the sale of assets between one specified country and all other countries over a specified period of time. Financial Account: refers to special types of investment, including D F I and portfolio investment. 4 Balance of Payments (3 of 6) Current Account Payments for Goods and Services Merchandise exports and imports represent tangible products that are transported between countries. Service exports and imports represent tourism and other services. The difference between total exports and imports is referred to as the balance of trade. Primary Income Payments Represents income earned by M N Cs on their direct foreign investment as well as income earned by investors on their portfolio investments. Secondary Income Represents aid, grants, and gifts from one country to another. 5 Balance of Payments (4 of 6) Current Account (continued) Examples of payment entries Exhibit 2.1. shows several examples of transactions that would be reflected in the current account. Actual U.S. current account balance The U.S. current account balance has been consistently negative since 19 92. Since 2011, the quarterly current account balance for the United States has typically exceeded $40 billion per month, which is primarily due to the U.S. balance-of-trade deficit. 6 Exhibit 2.1 Examples of Current Account Transactions (1 of 3) 7 Exhibit 2.1 Examples of Current Account Transactions (2 of 3) 8 Exhibit 2.1 Examples of Current Account Transactions (3 of 3) 9 Balance of Payments (5 of 6) Financial Account Direct foreign investment