International Finance_Minor Updates 2-11-09 - Important...

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1Important Aspects of the BOP Accounting SystemRecords international transactions made during a time period (say one year)Records Economic Transactions only (involves something of monetary value)Records transactions between residents of one country and residents of all other countriesIt is a Double-Entry System.  Each Transaction produces a credit entry and a debit entry of equal size.
21. Current AccountDebitsCreditsA. Merchandise imports and exportsB. Services: Net goods and services balanceC. Unilateral transfers:To AbroadFrom AbroadNet current account balanceBalance of Payment
3Balance of Payment2. Capital AccountDebitsCreditsA.Direct InvestmentTo AbroadFrom AbroadA.Portfolio InvestmentTo AbroadFrom AbroadA.Short-term capitalTo AbroadFrom AbroadNet Capital Account
4Balance of Payment3. Official Reserves AccountA.Gold Export of Import (net)B.Increase of decrease in foreign exchange (net)C.Increase of decrease in liabilities to foreign Central banks (net)4. Net Statistical DiscrepancyDebitsCredits
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6Major BOP ComponentsCurrent AccountExports & Imports of Goods and ServicesInvestment IncomeGiftsCapital AccountForeign Direct Investment & Portfolio InvestmentOfficial Reserves AccountGold, Convertible Securities, SDRs, & IMF ReservesErrors and OmissionsTo make BOP balance (smuggling, subterranean economy, swaps & hedging transactions)
7Strong Dollars Friends and FoesUS WINNERSUS LOSERSImportersExportersConsumerDomestic manufacturers competing with importsStock and Bond MarketsForeign TouristsTravelers Going Abroad
8Other BOP UsesCan Review Current Account-For Capital Inflows (Credits) and Outflows (Debits)-Capital Inflows when foreign owned assets rises-Capital Outflows when domestic owned foreign assets riseCan Review Official Reserves Account-Official Settlements Balance: Change in official reserves; net impact of central bank intervention in FX markets in support of currency.
9BOP Link with Foreign ExchangeForward prices of currencies often reflect BOP statisticsCurrencies from nations suffering from BOP trade deficits & high inflation will often sell at a forward discountCurrencies from nations with BOP trade surpluses and low inflation will often sell at a forward premiumThus, the BOP is helpful in determining future currency movements, and in assessing business conditions abroad
10Balance of Payments Accounting SystemPay attention to BOP Statistics:-Help identify emerging markets-Can warn of possible new policies that may alter a country’s business climate-Can indicate a reduction in a country’s foreign exchange reserves-Can signal increased riskiness of lending to particular countries
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