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CHAPTER 3 THE BALANCE OF PAYMENTS CHAPTER OUTLINE I. An Overview of the Balance of Payments a) Sources and uses of funds b) The balance of payments as a whole II. Balance-of-Payments Accounts a) The current account – Group A (1) Balance on goods (2) Services (3) Income (4) Current transfers (5) Current account b) The capital account - Group B c) The financial account – Group C d) Net errors and omissions – Group D e) Total, Groups A through D f) Reserves and related items – Group E (1) Accounting treatment of the reserve account c) The balance-of-payments identity III. The Actual Balance of Payments a) Major country balances on current and financial accounts b) The world balance of payments c) International investment position V. How to Reduce a Trade Deficit VI. Deflate the economy VII. Devalue the currency VIII. Establish public control IX. The J curve VI. Summary 16
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CHAPTER OBJECTIVES This chapter discusses the financial linkages between the domestic and world economies and how these linkages affect business viability. Chapter 3 is macro-oriented because it describes the balance of payments on a country-by-country basis. This macro discussion is useful information for a multinational company because the ability of the multinational company to move money across national boundaries can be affected by changes in a country's current account and capital account positions. Many factors determine a firm's ability to move funds from one country to another. In particular, a country's balance of payments affects the value of its currency, its ability to obtain currencies of other countries, and its policy toward foreign investment. KEY TERMS AND CONCEPTS Balance of payments for a country is commonly defined as a record of transactions between its residents and foreign residents over a specified period. Current transfers consist of all transfers that are not transfers of capital; they directly affect the level of disposable income and should influence the current consumption of goods and services. Current account includes merchandise exports and imports, earnings and expenditures for invisible trade items (services), and current transfer items. Capital account consists of capital transfers and the acquisition or disposal of nonproduced, nonfinancial assets. Financial account consists of foreign direct investments, foreign portfolio investments, and other investments. Foreign direct investments (FDI) are equity investments such as purchases of stocks, the acquisition of entire firms, or the establishment of new subsidiaries. Foreign portfolio investments are purchases of foreign bonds or other financial assets without a significant degree of management control. Special drawings rights
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