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Unformatted text preview: 22 S S N L 2 2: International Flow of Funds International business is facilitated by markets that al- low for the fl ow of funds between countries. The trans- actions arising from international business cause money fl ows from one country to another. The balance of pay- ments is a measure of international money fl ows and is discussed in this chapter. Financial managers of MNCs monitor the balance of payments so that they can determine how the fl ow of international transactions is changing over time. The balance of payments can indicate the volume of transactions between specifi c countries and may even signal potential shifts in specifi c exchange rates. The specific objectives of this chapter are to: explain the key components of the balance of payments, explain how international trade flows are influenced by economic factors and other factors, and explain how international capital flows are influenced by country characteristics. Balance of Payments The balance of payments is a summary of transactions between domestic and foreign residents for a specifi c country over a specifi ed period of time. It represents an ac- counting of a countrys international transactions for a period, usually a quarter or a year. It accounts for transactions by businesses, individuals, and the government. A balance-of-payments statement can be broken down into various components. Those that receive the most attention are the current account and the capital account. The current account represents a summary of the fl ow of funds between one specifi ed country and all other countries due to purchases of goods or services, or the provision of income on fi nancial assets. The capital account represents a summary of the fl ow of funds resulting from the sale of assets between one specifi ed country and all other countries over a specifi ed period of time. Thus, it compares the new foreign invest- ments made by a country with the foreign investments within a country over a partic- ular time period. Transactions that refl ect infl ows of funds generate positive numbers (credits) for the countrys balance, while transactions that refl ect outfl ows of funds generate negative numbers (debits) for the countrys balance. Current Account The main components of the current account are payments for (1) merchandise (goods) and services, (2) factor income, and (3) transfers. Payments for Merchandise and Services. Merchandise ex- ports and imports represent tangible products, such as computers and clothing, that are transported between countries. Service exports and imports represent tourism and other services, such as legal, insurance, and consulting services, provided for customers based in other countries. Service exports by the United States result in an Getty Images 02-B4324-KM1.indd 22 02-B4324-KM1.indd 22 8/21/07 2:14:52 AM 8/21/07 2:14:52 AM Chapter 2: International Flow of Funds 23 infl ow of funds to the United States, while service imports by the United States result...
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This note was uploaded on 02/14/2011 for the course FINANCE 640 taught by Professor Sen during the Fall '10 term at UMBC.
- Fall '10