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Slide 1
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 2
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Balance of Payments Balance of Payments page 39page 39The Current AccountThe Current AccountThe Capital AccountThe Capital Account
Exchange Rate Exchange Rate
IMF and the World BankIMF and the World Bank
Chapter 2Chapter 2
Slide 3
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
““A measurement of all A measurement of all transactions between transactions between domestic and foreign domestic and foreign residents over a period of residents over a period of time” time” Madura page 39Madura page 39
Slide 4
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Balance of Payments
Current accountCurrent account– balance of goods and servicesbalance of goods and services
net trade + interest and dividend paymentsnet trade + interest and dividend payments
– unilateral transfersunilateral transfers
importsimports
exportsexports
Measure of all transactions between Measure of all transactions between domestic and foreign residentsdomestic and foreign residents
Slide 5
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
BOP accounts provide a system for documenting BOP accounts provide a system for documenting economic transactions during a given period economic transactions during a given period between 2 countriesbetween 2 countries
A BOP statement documents a country’s past A BOP statement documents a country’s past economic transactions with other countrieseconomic transactions with other countries
• - like a “national” chequing account balance book- like a “national” chequing account balance book
Slide 6
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
2 basic concepts2 basic concepts
1. The statement is made up of balances, 1. The statement is made up of balances, which show either surplus or deficitwhich show either surplus or deficit
2. The total statement must be a balance2. The total statement must be a balance
Slide 7
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Statements are in 4 major SectionsStatements are in 4 major Sections 1. The Current Account1. The Current Account
- imports and exports of goods and services- imports and exports of goods and services 2. The Capital Account2. The Capital Account
- investments and loans- investments and loans 3. Errors and Omissions3. Errors and Omissions 4. The Official Reserve Account4. The Official Reserve Account
- changes in response to the surpluses or deficits in the - changes in response to the surpluses or deficits in the Current and Capital AccountCurrent and Capital Account
page 85 & 86 in text page 85 & 86 in text
Slide 8
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Explanation of BalancesExplanation of Balances5 categories5 categories
1. Balance of Trade1. Balance of Trade- imports and exports of JUST goods - imports and exports of JUST goods 2. Balance of Goods and Services2. Balance of Goods and Services3. 3. Current AccountCurrent Account- goods & services + short term capital transfers- goods & services + short term capital transfers4. Basic Balance4. Basic Balance - goods & services + long term capital transfers - goods & services + long term capital transfers5. The Official Settlements Account5. The Official Settlements Account- changes in response to the surpluses or deficits in the - changes in response to the surpluses or deficits in the Current and Capital AccountCurrent and Capital Account
Slide 9
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Careful analysis of a Country’s BOP Careful analysis of a Country’s BOP statements should be made before considering statements should be made before considering doing business in the country.doing business in the country.
This information can help you evaluate risk.This information can help you evaluate risk.
Slide 10
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Balance of Payments Trends in Trade
NAFTA: NAFTA: – free trade block of US, Canada and Mexicofree trade block of US, Canada and Mexico
European tradeEuropean trade– Single European ActSingle European Act
increased intra-european tradeincreased intra-european trade
– eastern european trade changeseastern european trade changes importing larger amounts of goods and servicesimporting larger amounts of goods and services
Trade agreements around the worldTrade agreements around the world
Slide 11
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Balance of Payments Trends in Trade
GATT trade agreementGATT trade agreement– 117 countries agreed to lower tariffs117 countries agreed to lower tariffs– trade barriers slowly eliminated until year 2000trade barriers slowly eliminated until year 2000
European capital flowEuropean capital flow– much capital shifting to eastern Europemuch capital shifting to eastern Europe– German reunificationGerman reunification
redirection of funds increased US interest rates redirection of funds increased US interest rates
Slide 12
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Factors affecting Current Account
1. Inflation1. Inflation– higher rates relative to other countries affects higher rates relative to other countries affects
tradetrade increased imports and decreased exportsincreased imports and decreased exports
2. National income2. National income– increases (decreases) relative to other countriesincreases (decreases) relative to other countries
current account decreases (increases)current account decreases (increases) greater wealth implies greater need for foreign goodsgreater wealth implies greater need for foreign goods
Slide 13
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Factors affecting Current Account
3. Government restrictions3. Government restrictions– tariff (tax on imported goods)tariff (tax on imported goods)
increases prices & lowers demand on imported increases prices & lowers demand on imported goodsgoods
increases current account of the countryincreases current account of the country US tariffs on apparel and farm productsUS tariffs on apparel and farm products tariffs imposed in different countries on a case of tariffs imposed in different countries on a case of
imported beer:imported beer:– US: $0.1235, Europe: $2.93, China: $14.64US: $0.1235, Europe: $2.93, China: $14.64
Slide 14
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Factors affecting Current Account
4. Exchange rates4. Exchange rates– a currency valued in terms of another currencya currency valued in terms of another currency– increase in exchange rate suggests decrease in increase in exchange rate suggests decrease in
current accountcurrent account exported goods would cost more, thus decreasing exported goods would cost more, thus decreasing
demand for the gooddemand for the good assumes price-elastic goods (sensitive to price assumes price-elastic goods (sensitive to price
changes)changes)
Slide 15
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
HistoryHistory
Currency value used to be based on stock of Currency value used to be based on stock of gold the government held in central bank.gold the government held in central bank.This was the This was the Fixed Exchange Rate SystemFixed Exchange Rate System
Problems developed when money was printed, Problems developed when money was printed, and not backed by goldand not backed by gold
In 1976 the world changed to aIn 1976 the world changed to a
Floating Exchange Rate SystemFloating Exchange Rate System
Slide 16
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Floating Exchange Rate SystemFloating Exchange Rate System this system determines the value of a currency this system determines the value of a currency
according to the demand for it, and the supply on the according to the demand for it, and the supply on the international 4X marketsinternational 4X markets
clean float - no government interventionclean float - no government intervention dirty float - government interventiondirty float - government intervention
current system is current system is managed ratesmanaged rates, not exactly free , not exactly free floatingfloating
small economies tie their rate to major trading partnerssmall economies tie their rate to major trading partners ie. Hong Kong dollar used to be “pegged” atie. Hong Kong dollar used to be “pegged” at
6 HK$ to 1 US$ 6 HK$ to 1 US$
Slide 17
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
181 countries181 countries - promotes int’l monetary cooperation - promotes int’l monetary cooperation
MAIN PURPOSESMAIN PURPOSES facilitate the expansion and balanced growth of int’l tradefacilitate the expansion and balanced growth of int’l trade promote currency exchange stabilitypromote currency exchange stability establishment of multilateral system of paymentsestablishment of multilateral system of payments help countries with temporary balance of payments help countries with temporary balance of payments
difficultiesdifficulties
http://www.imf.org/external/np/exr/facts/glance.htmhttp://www.imf.org/external/np/exr/facts/glance.htm
Slide 18
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
181 countries181 countries - promotes int’l monetary cooperation - promotes int’l monetary cooperation
MAIN ACTIVITYMAIN ACTIVITY Lends money to members who have trouble meeting Lends money to members who have trouble meeting
financial obligations - BUT, only on the condition financial obligations - BUT, only on the condition that they undertake economic reforms to eliminate that they undertake economic reforms to eliminate these difficulties for their own good.these difficulties for their own good.
http://www.imf.org/external/np/exr/facts/glance.htmhttp://www.imf.org/external/np/exr/facts/glance.htm
Slide 19
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
181 countries181 countries - promotes int’l monetary cooperation - promotes int’l monetary cooperation
Key DutiesKey Duties CFF - Compensatory Financing FacilityCFF - Compensatory Financing Facility purpose is to reduce the impact of export purpose is to reduce the impact of export
instability on country economiesinstability on country economies
Slide 20
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Areas of ActivityAreas of Activity SurveillanceSurveillance
It appraises its members exchange rate policiesIt appraises its members exchange rate policiesAnalyses their general economic situationAnalyses their general economic situation
Financial assistance to IMF member countriesFinancial assistance to IMF member countries Technical assistanceTechnical assistance
re: fiscal and monetary policyre: fiscal and monetary policy
http://www.imf.org/external/np/exr/facts/glance.htmhttp://www.imf.org/external/np/exr/facts/glance.htm
Slide 21
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
ORIGINS:ORIGINS:Official name: Official name: International Bank for International Bank for Reconstruction and DevelopmentReconstruction and Development
Founded to help reconstruct European Countries Founded to help reconstruct European Countries after WW IIafter WW II
http://www.worldbank.orghttp://www.worldbank.org
Slide 22
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Activities:Activities:Today it is involved in development aid for poor Today it is involved in development aid for poor countriescountriesLends money for long-term development projects.Lends money for long-term development projects.Works with the IMF to resolve debt problems in the Works with the IMF to resolve debt problems in the Developing WorldDeveloping WorldHas made mistakes in giving money to corrupt Has made mistakes in giving money to corrupt regimes.regimes.Made environmental mistakes ie. Gave money for a Made environmental mistakes ie. Gave money for a highway through Brazilian jungle.highway through Brazilian jungle.
Slide 23
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Activities:Activities:In situations where war has ended, the World In situations where war has ended, the World Bank acts to facilitate the transition to Bank acts to facilitate the transition to sustainable peace after hostilities cease and to sustainable peace after hostilities cease and to support economic and social development.support economic and social development.
Slide 24
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
World Investment FlowsWorld Investment Flows
- Portfolio Investment- Portfolio Investment stocks, bonds, securities, T-billsstocks, bonds, securities, T-bills
- Direct Investment- Direct Investmentmfg. plants, warehouses, processing mfg. plants, warehouses, processing
operations, representative officesoperations, representative offices
Slide 25
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Why FDI Exits
Land, Resources and some types of business Land, Resources and some types of business cannot be relocatedcannot be relocated
If a company wants access, they have to go thereIf a company wants access, they have to go there eg. Mining operations, forest harvestingeg. Mining operations, forest harvesting
If your customer moves overseas, you may follow If your customer moves overseas, you may follow to continue to be able to supplyto continue to be able to supply
eg. Autoparts companieseg. Autoparts companies
Slide 26
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Why FDI Exits
Some companies set up operations overseas Some companies set up operations overseas because manufacturing locally is cheaper than because manufacturing locally is cheaper than exporting and paying the shipping costsexporting and paying the shipping costs
Companies also setup mfg. Overseas in low-wage Companies also setup mfg. Overseas in low-wage areas to make products that are then sent back to areas to make products that are then sent back to customers in the Home Country, or to a 3rd customers in the Home Country, or to a 3rd marketmarket
eg. Japanese companies mfg. Electronic goods in eg. Japanese companies mfg. Electronic goods in Malaysia, and export to the USAMalaysia, and export to the USA
Slide 27
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Concerns of the Host Country
Jobs for citizensJobs for citizens Additional taxesAdditional taxes TechnologyTechnology Attraction to other types of companiesAttraction to other types of companies loss of economic controlloss of economic control vulnerability to employment crisis if co. vulnerability to employment crisis if co.
leavesleaves
