Ch. 71 - Balance Of Payments Issues

Question 1

2 parts of FDI?

Answer 1

• flows of money to purchase a controlling interest in a foreign firm (>10% of shares)
• reinvested earnings - profits of foreign owned companies which are reinvested in that company

Question 2

2 parts of portfolio investment?

Answer 2

-flows of money to purchase foreign shares (

Question 3

Other investments in the financial account?

Answer 3

-eg. Trade credit, loans, banks deposits and purchases of currency

Question 4

Equation linking accounts?

Answer 4

Current account - (capital account + financial account) = 0

Question 5

Reasons for international capital flows? (7)

Answer 5

PFELBBS
Portfolio investment
FDI
Evasion of tax
Loans
Banks finding profits in lending abroad
Bonds (long term loans to gov.)
Speculators

Question 6

What is the capital account?

Answer 6

The capital account is the national account that shows the net change in asset ownership for a nation.

Question 7

3 advantages of international capital flows?

Answer 7

• facilitates world growth
• can provide finance to firms in countries who otherwise would be unable to get finance
• FDI leads to a transfer of tech. and info between countries

Question 8

3 disadvantages of international capital flows?

Answer 8

• when one part of worlds economy has difficulties it increasingly affects the whole
• FDI leads to domestic firms being owned by other countries tf problems associated with TNCs
• availability of international credit encourages over borrowing tf causing debt problems

Question 9

3 parts of financial account?

Answer 9

• FDI
• Portfolio investment
• Other investments