Slide 1
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 2
Chapter 2
Balance of Payments
page 39
 The
Current Account
 The Capital Account
Exchange Rate
IMF and the World Bank
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 3
“A
measurement of all
transactions between
domestic and foreign
residents over a period of
time” Madura page 39
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 4
Balance of Payments
Measure of all transactions between
domestic and foreign residents
 Current
account
– balance of goods and services
 net
trade + interest and dividend payments
– unilateral transfers
exports
imports
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 5
 BOP
accounts provide a system for
documenting economic transactions during a
given period between 2 countries
 A BOP
statement documents a country’s past
economic transactions with other countries
• - like a “national” chequing account balance
book
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 6
2
basic concepts
 1.
The statement is made up of balances,
which show either surplus or deficit
 2.
The total statement must be a balance
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 7
Statements are in 4 major Sections
 1.
The Current Account
- imports and exports of goods and services
 2. The Capital Account
- investments and loans
 3. Errors and Omissions
 4. The Official Reserve Account
- changes in response to the surpluses or deficits
in the Current and Capital Account
page 85 & 86 in text
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 8
Explanation
of Balances
5 categories
1. Balance of Trade
- imports and exports of JUST goods
2. Balance of Goods and Services
3. Current Account
- goods & services + short term capital transfers
4. Basic Balance
- goods & services + long term capital transfers
5. The Official Settlements Account
- changes in response to the surpluses or deficits in the
Current and Capital Account
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 9
Careful analysis of a Country’s BOP
statements should be made before considering
doing business in the country.
This information can help you evaluate risk.
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 10
Balance of Payments
Trends in Trade
 NAFTA:
– free trade block of US, Canada and Mexico
 European
trade
– Single European Act
 increased
intra-european trade
– eastern european trade changes
 importing
 Trade
larger amounts of goods and services
agreements around the world
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 11
Balance of Payments
Trends in Trade
 GATT
trade agreement
– 117 countries agreed to lower tariffs
– trade barriers slowly eliminated until year 2000
 European
capital flow
– much capital shifting to eastern Europe
– German reunification
 redirection
of funds increased US interest rates
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 12
Factors affecting Current
Account
 1.
Inflation
– higher rates relative to other countries affects
trade
 increased
 2.
imports and decreased exports
National income
– increases (decreases) relative to other countries
 current
account decreases (increases)
 greater wealth implies greater need for foreign
goods
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 13
Factors affecting Current
Account
 3.
Government restrictions
– tariff (tax on imported goods)
 increases
prices & lowers demand on imported
goods
 increases current account of the country
 US tariffs on apparel and farm products
 tariffs imposed in different countries on a case of
imported beer:
– US: $0.1235, Europe: $2.93, China: $14.64
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 14
Factors affecting Current
Account
 4.
Exchange rates
– a currency valued in terms of another currency
– increase in exchange rate suggests decrease in
current account
 exported
goods would cost more, thus decreasing
demand for the good
 assumes price-elastic goods (sensitive to price
changes)
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 15
History
Currency value used to be based on stock of
gold the government held in central bank.
This was the Fixed Exchange Rate System
Problems developed when money was printed,
and not backed by gold
In 1976 the world changed to a
Floating Exchange Rate System
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 16
Floating Exchange Rate System
 this system determines the value of a
currency according to the demand for it, and
the supply on the international 4X markets
 clean
float - no government intervention
 dirty float - government intervention
 current
system is managed rates, not exactly
free floating
 small economies tie their rate to major
trading partners
 developed
ie. HongbyKong
dollarwith
used
to be and
“pegged”
at by Tim Richardson
Slides
Jeff Madura,
additions
enhancements
Slide 17
181 countries
- promotes int’l monetary cooperation
MAIN PURPOSES
 facilitate
the expansion and balanced growth of int’l
trade
 promote currency exchange stability
 establishment of multilateral system of payments
 help countries with temporary balance of payments
http://www.imf.org/external/np/exr/facts/glance.htm
difficulties
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 18
181 countries
- promotes int’l monetary cooperation
MAIN ACTIVITY
 Lends
money to members who have trouble meeting
financial obligations - BUT, only on the condition
that they undertake economic reforms to eliminate
these difficulties for their own good.
http://www.imf.org/external/np/exr/facts/glance.htm
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 19
181 countries
- promotes int’l monetary cooperation
Key Duties
 CFF
- Compensatory Financing Facility
 purpose is to reduce the impact of export
instability on country economies
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 20
Areas of Activity
 Surveillance
 It
appraises its members exchange rate policies
 Analyses their general economic situation
 Financial assistance to IMF member countries
 Technical assistance
 re: fiscal and monetary policy
http://www.imf.org/external/np/exr/facts/glance.htm
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 21
ORIGINS:
Official name: International Bank for
Reconstruction and Development
Founded to help reconstruct European
Countries after WW II
http://www.worldbank.org
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 22
Activities:
Today it is involved in development aid for
poor countries
Lends money for long-term development
projects.
Works with the IMF to resolve debt problems in
the Developing World
Has made mistakes in giving money to corrupt
regimes.
Made environmental mistakes ie. Gave money
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 23
Activities:
In situations where war has ended, the World
Bank acts to facilitate the transition to
sustainable peace after hostilities cease and to
support economic and social development.
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 24
World Investment Flows
- Portfolio Investment
 stocks,
bonds, securities, T-bills
- Direct Investment
 mfg.
plants, warehouses, processing
operations, representative offices
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Why FDI Exits
Slide 25
 Land,
Resources and some types of business
cannot be relocated
 If a company wants access, they have to go there
 eg.
Mining operations, forest harvesting
 If
your customer moves overseas, you may follow
to continue to be able to supply
 eg. Autoparts
companies
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Why FDI Exits
Slide 26
 Some
companies set up operations overseas
because manufacturing locally is cheaper than
exporting and paying the shipping costs
 Companies also setup mfg. Overseas in low-wage
areas to make products that are then sent back to
customers in the Home Country, or to a 3rd market
 eg.
Japanese companies mfg. Electronic goods in
Malaysia, and export to the USA
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson
Slide 27
Concerns of the Host Country
 Jobs
for citizens
 Additional taxes
 Technology
 Attraction to other types of companies
 loss of economic control
 vulnerability to employment crisis if co.
leaves
Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson