Topic 5 Nature of International Financing and its Vehicles.ppt

Topic 5 Nature of International Financing and its Vehicles.ppt

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Topic 5: NATURE OF INTERNATIONAL FINANCING AND ITS VEHICLES Lecture Notes Prepared by: Dr. Martine Oleche University of Nairobi School of Economics 09/11/18 1 Dr. Martine Oleche, School of Economics, University of Nairobi
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5.1 External sector activities and international financing Three major types of activities in the external sector of any nation give rise to the need for international financing. These are trade across national borders (export and import), capital flows (both direct and indirect investment across borders) and unrequited transfer (e.g. home remittances, relief materials, etc) which result in the demand for and supply of international means of payment often called foreign exchange. To appreciate the issues at stake, we describe as briefly as possible, the following fundamental concept: (Andy, 2001). 09/11/18 Dr. Martine Oleche, School of Economics, University of Nairobi 2
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External sector activities and international financing Contd… i).Import When for instance, a Kenyan Motor Vehicle distributor buys a Suzuki motor cycle from Japan, he has engaged in importation because the trade involves the exchange of goods outside the national boundary of Kenya. The motor cycle so imported is a visible import because the subject of the exchange – Suzuki – can be seen and touched physically. Beside visible imports, there are invisible ones. These are trade in services. Though they attract values, they cannot be seen or touched physically. For instance, when a Kenyan goes for medical treatment in the U.S.A. medical services have been imported. 09/11/18 Dr. Martine Oleche, School of Economics, University of Nairobi 3
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External sector activities and international financing Contd… Also, after the Suzuki Motor Cycle referred to above was purchased, it has to be transported to Kenya as well as insured. If foreign transport and insurance firms respectively undertook the transportation and the insurance of the Suzuki from Japan to Kenya transport and insurance services have been imported. It is worth nothing, that if rather than going for medial treatment abroad a Kenyan obtains such services in the Kenyan market, no importation would be involved. It would be like any other domestic services that are traded locally e.g. barbing, consultancy etc. 09/11/18 Dr. Martine Oleche, School of Economics, University of Nairobi 4
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External sector activities and international financing Contd… Also, if rather than engaging foreign firms in the transportation and insurance of the Suzuki motor cycle, domestic firms are engaged, no importation would be involved. It must be noted that foreign currencies are required to settle import bills. ii).Export In the example of the Suzuki importation stated above, Kenya imported while Japan exported. One country’s export is another country’s import.
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  • Fall '18
  • Dr. Martine Oleche
  • University of Nairobi, Foreign exchange market, SCHOOL OF ECONOMICS, Dr. Martine Oleche

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