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Lecture_04_2007 - International Finance FINA 5331 Lecture 4...

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International Finance FINA 5331 Lecture 4: Balance of Payments William J. Crowder Ph.D.
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Balance of Payments Accounting The Balance of Payments is the statistical record of a country’s international transactions over a certain period of time presented in the form of double-entry bookkeeping. N.B. when we say “a country’s balance of payments” we are referring to the transactions of its citizens and government .
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Balance of Payments Example Suppose that Maplewood Bicycle in Maplewood, Missouri, USA imports $100,000 worth of bicycle frames from Mercian Bicycles in Darby England. There will exist a $100,000 credit recorded by Mercian that offsets a $100,000 debit at Maplewood’s bank account. This will lead to a rise in the supply of dollars and the demand for British pounds.
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The balance of payments accounts are those that record all transactions between the residents of a country and residents of all foreign nations. They are composed of the following: The Current Account The Capital Account The Official Reserves Account Statistical Discrepancy Balance of Payments Accounts
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The Current Account Includes all imports and exports of goods and services (invisible trade). Includes unilateral transfers of foreign aid. If the debits exceed the credits, then a country is running a trade deficit . If the credits exceed the debits, then a country is running a trade surplus . It is thought that the CA responds to changes in income and the exchange rate.
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The Current Account A credit on the current account results in foreign reserves flowing in (fixed exchange rate) or an increase in the demand for domestic currency in the FOREX market (flexible exchange rate). A debit on the current account results in foreign reserves flowing out of the domestic economy (fixed exchange rate) or an increase in the supply of domestic currency in the FOREX market (flexible exchange rate).
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The Current Account When a domestic company sells goods or services to a foreign resident, there will be a credit recorded on the current account. When a domestic resident buys goods or services from a foreign firm, there will be a debit recorded on the current account. When a foreign asset pays interest to a domestic resident, or a domestic resident earns income in the foreign economy, there will be a credit recorded on the current account. When a domestic asset pays interest to a foreign resident, or a foreign resident earns income in the domestic economy, there will be a debit recorded on the current account.
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What affects the CA? CA deficit 0 CA(S 0 ) CA surplus Domestic Income (Y) Y 0 Given the exchange rate, S 0 , there exists some domestic income level, Y 0 , where the current account is balanced.
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What affects the CA?
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