Chapter 2 Book Notes - Chapter 2 International Flow of...

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Chapter 2: International Flow of FundsMNC’s are engaged in international business Ex) Exporting, importing, direct foreign investments…Causes money to flow from one country to another Balance of PaymentsBalance of payments – summary of transactions between domestic and foreign residents Transactions by businesses, individuals and government oCan be broke down into:a)Current accountsRepresents a summary of the flow of funds between onespecified country and all other countries due to purchases of goods and services or to the cash flows generated by income producing financial assetsb)Capital accountsSummary of the flow of funds resulting from the sale ofassets between one specified country and all other countries over a period of time oCompares new foreign investments made by a country with the foreign investments within a country over a timec)Financial accounts Special types of investments Examples – DFI and portfolio investmentsInflow of funds generated positive numbers – credit Outflow of funds = negative numbers – debit Current AccountMain components = payments for:1.Merchandise (goods) and services 2.Factor income3.Transfers 1.Payments for goods and services Merchandise import/export – tangible productsService imports/exports – tourism, other services (legal, consulting)(Which are provided to other countries)Service exports by U.S = cash inflow of funds to U.SImports by U.S = cash outflows -Difference between imports and exports = balance of trade Balance of trade oDeficit – value of exports < value of imports (In the U.S exports usually exceed imports) oOverall, U.S balance of trade is negative 2.Factor income payments Represents income (interest and dividend payments) received by investors on foreign investments in financial assets (securities)oFactors income received by U.S = inflow of funds in U.SoFactor income paid by U.S = outflow of funds in U.S 3.Transfer payments Examples: aids, grants, gifts from one country to another
Chapter 2: International Flow of FundsExamples of Payments entries – large current account deficit = U.S is spending/sending more cash abroad to buy goods/services/to pay income that it is receiving for its sale of goods and services Capital AccountIncludes value of financial assets transferred across country borders by people who move to a different country oU.S sells patent = creditoU.S buys parent = debitFinancial AccountKey components:1.Direct Foreign Investment2.Portfolio Investment3.Other Capital Investment1.Direct Foreign InvestmentRepresents the investment in fixed assets in foreign countries that can be used to conduct business operations oEx) Firm’s acquisition of a foreign company construction of new manufacturing plant, expansion of a new plant2.Portfolio InvestmentTransactions between countries involving long term financial assets (such as stocks and bonds that do not affect the transfer of control)oEx) purchase of stock by U.S investors

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