International Flow of Funds.pdf

BALANCE OF PAYMENTS IT IS A SUMMARY OF TRANSACTIONS BETWEEN DOMESTIC AND FOREIGN RESIDENTS FOR A SPECIFIC COUNTRY OVER A SPECIFIED PERIOD OF TIME. A BALANCE-OF-PAYMENTS IS COMPOSED OF: 1. CURRENT ACCOUNT 2. CAPITAL ACCOUNT 3. FINANCIAL ACCOUNT 1. CURRENT ACCOUNT IT MEASURES THE FLO...

BALANCE OF PAYMENTS IT IS A SUMMARY OF TRANSACTIONS BETWEEN DOMESTIC AND FOREIGN RESIDENTS FOR A SPECIFIC COUNTRY OVER A SPECIFIED PERIOD OF TIME. A BALANCE-OF-PAYMENTS IS COMPOSED OF: 1. CURRENT ACCOUNT 2. CAPITAL ACCOUNT 3. FINANCIAL ACCOUNT 1. CURRENT ACCOUNT IT MEASURES THE FLOW OF FUNDS BETWEEN ONE COUNTRY AND ALL OTHER COUNTRIES DUE TO PURCHASES OF GOODS AND SERVICES OR TO INCOME GENERATED BY ASSETS. THE COMPONENTS OF THE CURRENT ACCOUNT ARE PAYMENTS BETWEEN TWO COUNTRIES FOR: A.MERCHANDISE (GOODS AND SERVICES) B.PRIMARY INCOME C.SECONDARY INCOME A. PAYMENTS FOR GOODS AND SERVICES MERCHANDISE EXPORTS AND IMPORTS REPRESENT TANGIBLE PRODUCTS, SUCH AS SMARTPHONES AND CLOTHING, THAT ARE TRANSPORTED BETWEEN COUNTRIES. SERVICE EXPORTS AND IMPORTS REPRESENT TOURISM AND OTHER SERVICES (SUCH AS LEGAL, INSURANCE, AND CONSULTING SERVICES) PROVIDED FOR CUSTOMERS BASED IN OTHER COUNTRIES. SERVICE IMPORTS OF A COUNTRY WOULD RESULT TO AN OUTFLOW OF FUNDS SERVICE EXPORTS OF A COUNTRY WOULD RESULT TO AN INFLOW OF FUNDS B. PRIMARY INCOME PAYMENTS A FACTOR INCOME WHICH IS MOSTLY COMPOSED OF INCOME EARNED BY MNCS ON THEIR DFI (INVESTMENT IN FIXED ASSETS IN FOREIGN COUNTRIES THAT CAN BE USED TO CONDUCT BUSINESS OPERATIONS), AND ALSO INCOME EARNED BY INVESTORS ON PORTFOLIO INVESTMENT (INVESTMENTS IN FOREIGN SECURITIES). PRIMARY INCOME RECEIVED BY THE COUNTRY REFLECTS AN INFLOW OF FUNDS PRIMARY INCOME PAID BY THE COUNTRY REFLECTS AN OUTFLOW OF FUNDS C. SECONDARY INCOME TRANSFER PAYMENTS WHICH REPRESENTS AID, GRANTS, AND GIFTS FROM ONE COUNTRY TO ANOTHER. THE COUNTRY PROVIDING AIDS TO ANOTHER COUNTRY WOULD RESULT TO AN OUTFLOW OF FUNDS THE COUNTRY RECEIVING AIDS FROM OTHER COUNTRY WOULD RESULT TO AN INFLOW OF FUNDS 2. FINANCIAL ACCOUNT IT MEASURES THE FLOW OF FUNDS BETWEEN COUNTRIES THAT ARE DUE TO: A.DIRECT FOREIGN INVESTMENT B.PORTFOLIO INVESTMENT C.OTHER CAPITAL INVESTMENT A. DIRECT FOREIGN INVESTMENT PAYMENTS REPRESENTING DFI IN A COUNTRY (SUCH AS ACQUISITION OF A US FIRM BY A NON-US FIRM) ARE RECORDED AS A POSITIVE NUMBER IN THE US FINANCIAL ACCOUNT, BECAUSE FUNDS ARE FLOWING INTO THAT COUNTRY. PAYMENTS REPRESENTING A US BASED MNCS DFI IN ANOTHER COUNTRY ARE RECORDED AS A NEGATIVE NUMBER BECAUSE FUNDS ARE BEING SENT FROM THE UNITED STATES TO ANOTHER COUNTRY. B. PORTFOLIO INVESTMENT A PURCHASE OF FOREIGN FINANCIAL ASSETS WITHOUT CHANGING CONTROL OF THE COMPANY IS RECORDED AS A NEGATIVE NUMBER FOR THE COUNTRY INVESTING ON IT; BECAUSE IT REFLECTS A PAYMENT FROM THE US TO ANOTHER COUNTRY. C. OTHER CAPITAL INVESTMENT THIS REPRESENTS TRANSACTIONS INVOLVING SHORT-TERM FINANCIAL ASSETS (SUCH AS MONEY MARKET SECURITIES) BETWEEN COUNTRIES. 3. CAPITAL ACCOUNT THIS MEASURES THE FLOW OF FUNDS BETWEEN ONE COUNTRY AND ALL OTHER COUNTRIES DUE TO FINANCIAL ASSETS TRANSFERRED ACROSS COUNTRY BORDERS BY PEOPLE WHO MOVE TO A DIFFERENT COUNTRY OR DUE TO SALES OF PATENTS AND TRADEMARKS THE SALE OF PATENT RIGHTS BY A U.S. FIRM TO A CANADIAN FIRMS IS RECORDED AS A POSITIVE AMOUNT TO THE U.S. CAPITAL ACCOUNT IF THE U.S. FIRM PURCHASE PATENT RIGHTS FROM A CANADIAN FIRM IS RECORDED AS A NEGATIVE AMOUNT TO THE U.S. CAPITAL ACCOUNT RELATIONSHIP BETWEEN THE ACCOUNTS IF A COUNTRY HAS A NEGATIVE CURRENT ACCOUNT BALANCE, THEN IT SHOULD HAVE A POSITIVE FINANCIAL AND CAPITAL ACCOUNT BALANCE (AND VICE VERSA). THIS IMPLIES THAT IF IT SENDS MORE MONEY OUT OF THE COUNTRY THAN IT RECEIVES FROM OTHER COUNTRIES DUE TO INTERNATIONAL TRADE AND INCOME PAYMENTS, IT RECEIVES MORE MONEY FROM OTHER COUNTRIES THAN IT SPENDS ON FOREIGN INVESTMENTS. GROWTH IN INTERNATIONAL TRADE EVENTS THAT INCREASED TRADE VOLUME FALL OF THE BERLIN WALL SINGLE EUROPEAN ACT NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) GENERAL ON TARIFFS AND TRADE (GATT) THE EUROPEAN UNION (EU) INCEPTION OF THE EURO OTHER TRADE AGREEMENTS GROWTH IN INTERNATIONAL TRADE IMPACT OF OUTSOURCING ON TRADE OUTSOURCING REFERS TO THE PROCESS OF SUBCONTRACTING TO A THIRD PARTY. IT ALLOWS MNCS TO CONDUCT OPERATIONS AT A LOWER COST.  FACTORS AFFECTING INTERNATIONAL TRADE FLOWS THE MOST INFLUENTIAL FACTORS ARE: COST OF LABOR INFLATION NATIONAL INCOME CREDIT CONDITIONS GOVERNMENT POLICIES EXCHANGE RATES COST OF LABOR FIRMS IN COUNTRIES WHERE LABOR COSTS ARE LOW TYPICALLY HAVE AN ADVANTAGE WHEN COMPETING GLOBALLY, ESPECIALLY IN LABOR-INTENSIVE INDUSTRIES. MANY OF CHINA’S WORKERS EARN WAGES OF LESS THAN $300 PER MONTH, SO CHINA’S FIRMS COMMONLY MAKE PRODUCTS THAT REQUIRE MANUAL LABOR – AT A MUCH LOWER COST THAN MOST COUNTRIES IN EUROPE AND NORTH AMERICA. INFLATION IF A COUNTRY’S INFLATION RATE INCREASES RELATIVE TO THE COUNTRIES WITH WHICH IT TRADES, THIS COULD CAUSE ITS EXPORTS TO DECREASE (IF FOREIGN CUSTOMERS SHIFT TO CHEAPER ALTERNATIVES IN OTHER COUNTRIES) AND ITS IMPORTS TO INCREASE (IF LOCAL INDIVIDUALS AND FIRMS SHIFT TO CHEAPER ALTERNATIVES). CONSEQUENTLY, AN INCREASE IN THE COUNTRY’S INFLATION MAY CAUSE ITS CURRENT ACCOUNT TO DECREASE. NATIONAL INCOME IF A COUNTRY’S INCOME LEVEL INCREASES BY A HIGHER PERCENTAGE THAN THOSE OF OTHER COUNTRIES, THEN ITS CURRENT ACCOUNT SHOULD DECREASE, OTHER THINGS BEING EQUAL. AS THE REAL INCOME LEVEL RISES, SO DOES CONSUMPTION OF GOODS. A PERCENTAGE INCREASE OF THAT INCREASE IN CONSUMPTION WILL MOST LIKELY REFLECT AN INCREASE DEMAND FOR FOREIGN GOODS. CREDIT CONDITIONS CREDIT CONDITIONS TEND TO TIGHTEN WHEN ECONOMIC CONDITIONS WEAKEN BECAUSE CORPORATIONS ARE LESS ABLE TO REPAY DEBT. IN THAT CASE, BANKS ARE LESS WILLING TO PROVIDE FINANCING TO MNCS, WHICH CAN REDUCE CORPORATE SPENDING AND FURTHER WEAKEN THE ECONOMY. AS MNCS REDUCE THEIR SPENDING, THEY ALSO REDUCE THEIR DEMAND FOR IMPORTED SUPPLIES. THE RESULT IS A DECLINE IN INTERNATIONAL TRADE FLOWS. GOVERNMENT POLICIES THIS CAN HAVE A MAJOR INFLUENCE ON WHICH FIRMS WITHIN AN INDUSTRY ATTAIN THE MOST MARKET SHARE WORLDWIDE. THESE POLICIES AFFECT THE LEGISLATING COUNTRY’S UNEMPLOYMENT LEVEL, INCOME LEVEL, AND ECONOMIC GROWTH. RESTRICTIONS ON IMPORTS; SUBSIDIES FOR EXPORTERS; RESTRICTIONS ON PIRACY; ENVIRONMENTAL RESTRICTIONS; LABOR LAWS; BUSINESS LAWS; TAX BREAKS; COUNTRY TRADE REQUIREMENTS; GOVERNMENT OWNERSHIP OR SUBSIDIES; COUNTRY SECURITY LAWS; POLICIES TO PUNISH COUNTRY GOVERNMENTS EXCHANGE RATES THE VALUES OF MOST CURRENCIES FLUCTUATE OVER TIME BECAUSE OF MARKET AND GOVERNMENT FORCES. IF A COUNTRY’S CURRENCY BEGINS TO RISE IN VALUE AGAINST OTHER CURRENCIES THEN ITS CURRENT ACCOUNT BALANCE SHOULD DECREASE, OTHER THINGS BEING EQUAL. AS THE CURRENCY STRENGTHENS, GOODS EXPORTED BY THAT COUNTRY WILL BECOME MORE EXPENSIVE TO THE IMPORTING COUNTRIES AND THUS THE DEMAND FOR SUCH GOODS WILL DECREASE. AGENCIES THAT FACILITATE INTERNATIONAL FLOWS INTERNATIONAL MONETARY FUND (IMF) WORLD BANK WORLD TRADE ORGANIZATION (WTO) INTERNATIONAL FINANCE CORPORATION INTERNATIONAL DEVELOPMENT ASSOCIATION BANK FOR INTERNATIONAL SETTLEMENTS OECD REGIONAL DEVELOPMENT AGENCIES INTERNATIONAL MONETARY FUND THE UNITED NATIONS MONETARY AND FINANCIAL CONFERENCE HELD IN BRETTON WOODS, NEW HAMPSHIRE, IN JULY 1944 WAS CALLED TO DEVELOP A STRUCTURED INTERNATIONAL MONETARY SYSTEM. THE MAJOR OBJECTIVES IF IMF: 1. PROMOTE COOPERATION AMONG COUNTRIES ON INTERNATIONAL MONETARY ISSUES 2. PROMOTE STABILITY IN EXCHANGE RATES 3. PROVIDE TEMPORARY FUNDS TO MEMBER COUNTRIES ATTEMPTING TO CORRECT IMBALANCES OF INTERNATIONAL PAYMENTS 4. PROMOTE FREE MOBILITY OF CAPITAL FUNDS ACROSS COUNTRIES 5. PROMOTE FREE TRADE WORLD BANK INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (IBRD) ITS PRIMARY OBJECTIVE IS TO MAKE LOANS TO COUNTRIES IN ORDER TO REDUCE POVERTY AND ENHANCE ECONOMIC DEVELOPMENT. ITS MAIN SOURCE OF FUNDS IS THE SALE OF BONDS AND OTHER DEBT INSTRUMENTS TO PRIVATE INVESTORS AND GOVERNMENTS. COFINANCING AGREEMENTS FOR DEVELOPING COUNTRIES MULTILATERAL INVESTMENT GUARANTEE AGENCY (MIGA) WORLD TRADE ORGANIZATION THIS ORGANIZATION WAS ESTABLISHED TO PROVIDE A FORUM FOR MULTILATERAL TRADE ORGANIZATIONS AND TO SETTLE TRADE DISPUTES RELATED TO GATT. INTERNATIONAL FINANCE CORPORATION THIS WAS ESTABLISHED TO PROMOTE PRIVATE ENTERPRISE WITHIN COUNTRIES. PROMOTES ECONOMIC DEVELOPMENT THROUGH THE PRIVATE RATHER THAN THE GOVERNMENT SECTOR IT SERVES AS A CATALYST, RATHER THAN A PRIMARY SUPPORTER, FOR PRIVATE- ENTERPRISE DEVELOPMENT PROJECTS INTERNATIONAL DEVELOPMENT ASSOCIATION (IDA) ITS LOAN POLICY IS MORE APPROPRIATE FOR LESS PROSPEROUS NATIONS THE IDA EXTENDS LOANS AT LOW INTEREST RATES TO POOR NATIONS THAT CANNOT QUALIFY FOR LOANS FROM THE WORLD BANK BANK FOR INTERNATIONAL SETTLEMENTS BIS ATTEMPTS TO FACILITATE COOPERATION AMONG COUNTRIES WITH REGARD TO INTERNATIONAL TRANSACTIONS IT SERVES CENTRAL BANKS OF COUNTRIES IN THEIR PURSUIT OF FINANCIAL STABILITY SOMETIMES REFERRED TO AS THE “CENTRAL BANKS’ CENTRAL BANK” OR THE “LENDER OF LAST RESORT” IT COMMONLY PROVIDES FINANCING FOR CENTRAL BANKS IN LATIN AMERICAN AND EASTERN EUROPEAN COUNTRIES. ORGANIZATION FOR ECONOMIC CO- OPERATION AND DEVELOPMENT (OECD) OECD FACILITATES GOVERNANCE IN GOVERNMENTS AND CORPORATIONS OF COUNTRIES WITH MARKET ECONOMICS. IT PROMOTES INTERNATIONAL COUNTRY RELATIONSHIPS THAT LEAD TO GLOBALIZATION.