Flashcards in FINC 327 Chapter 2: BOP Deck (35)
The balance of payments is
is a summary of transactions between domestic and foreign
residents for a specific country over a specified period of time.
represents a summary of the flow of funds
between one specified country and all other countries due to purchases of goods and services
or to the cash flows generated by income-producing financial assets
sale of assets
between one specified country and all other countries over a specified period of time;
3 components of current acct
(1) merchandise (goods)
and services, (2) factor income, and (3) transfers.
balance of trade.
The difference between total exports and imports
J.C. Penney purchases stereos produced in Indonesia that it will sell in its U.S. retail stores.
Individuals in the United States purchase CDs over the Internet from a firm based in China.
The Mexican government pays a U.S. consulting firm for consulting services provided by the firm.
IBM headquarters in the United States purchases computer chips from Singapore that it uses in assembling computers.
A university bookstore in Ireland purchases textbooks
produced by a U.S. publishing company.
A U.S. investor receives a dividend payment from
a French firm in which she purchased stock.
The U.S. Treasury sends an interest payment to a German insurance company that purchased U.S. Treasury bonds one year ago.
A Mexican company that borrowed dollars from a bank based in the United States sends an interest payment to that bank.
The United States provides aid to Costa Rica in response to a flood in Costa Rica.
Switzerland provides a grant to U.S. scientists to work on cancer research.
Factors that affect international trade flows
■ cost of labor,
■ national income,
■ credit conditions,
■ government policies, and
■ exchange rates.
If a country’s inflation rate increases relative to the countries with which it trades, then
its current account should decrease, other things being equal
If a country’s income level (national income) increases by a higher percentage than those
of other countries, then
its current account should decrease, other things being equal.
when Credit conditions tend to tighten, what happens to international trade?
decline in international trade flows
government imposes a tax on imported goods, consumers must pay more to purchase foreign goods
a maximum limit that can be imported
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 so the demand for such goods will decrease
Limitations of a Weak–Home Currency Solution
counterpricing from comps
there may be other weaker countries
stability of intra trade companies
=0=current asset balance + capital acct bal + NOR balance
Direct Foreign Investment
a firm’s acquisition of a foreign company, its construction of a new manufacturing plant, or its expansion of an existing plant in a foreign country.
How Exchange Rates May Correct a Balance-of-Trade Deficit
A balance-of-trade deficit suggests that the country is spending more funds on foreign products than it is receiving from exports to foreign countries. This exchange of its currency (to buy foreign goods) in greater volume than the foreign demand for its currency could place downward pressure on the value of that currency.
Once the country’s home currency’s value declines in response to these forces, the result should be more foreign demand for its products.
International Monetary Fund (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
(5) promote free trade
It is clear from these objectives that the IMF’s goals encourage the increased internationalization of business.
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.
World Trade Organization (WTO)
provide a forum for multilateral trade negotiations and to settle trade disputes related to the GATT.