Ch183 - INTERNATIONAL FINANCE 18 CHAPTER Objectives After...

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Eco2013 Sp03 Cobbe Chapter 18 [notes 17] Page 1 of 16 18 CHAPTER INTERNATIONAL FINANCE Objectives After studying this chapter, you will be able to § Explain how international trade is financed § Describe a country’s balance of payments accounts § Explain what determines the amount of international borrowing and lending § Explain why the United States changed from being a lender to being a borrower in the mid-1980s § Explain how the foreign exchange value of the dollar is determined § Explain why the foreign exchange value of the dollar fluctuates ¥€$ The yen (¥), the euro (€), and the dollar ($) are the world’s three big currencies. Why do currency exchange rates fluctuate? Foreigners are buying up American assets on a big scale. Why?
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Eco2013 Sp03 Cobbe Chapter 18 [notes 17] Page 2 of 16 Financing International Trade When we buy something from another country, we often use the currency of that country to make the transaction. International transactions are recorded in the balance of payments accounts. Balance of Payments Accounts A country’s balance of payments accounts records all its international transactions, including trade, factor payments, investment, gifts, borrowing and lending. Financing International Trade There are three balance of payments accounts: § Current account § Capital account § Official settlements account The current account records payments for imports of goods and services from abroad, receipts from exports of goods and services sold abroad, net factor income [such as interest] paid abroad, and net transfers (such as remittances, foreign aid payments). The current accounts balance equals the sum of exports minus imports, net factor income and net transfers. Financing International Trade The capital account records foreign investment in the United States minus U.S. investments abroad. (This account also shows the “statistical discrepancy” that arises from errors and omissions in measuring capital and other transactions.) The official settlements account records the change in U.S. official reserves. U.S. official reserves are the government’s holdings of foreign currency and other liquid assets. If U.S. official reserves increase, the official settlements account is negative. The balances of these three accounts must sum to zero.
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Eco2013 Sp03 Cobbe Chapter 18 [notes 17] Page 3 of 16 Financing International Trade Figure 18.1 shows the balance of payments (as a percentage of GDP) over the period 1981 to 2001. Financing International Trade Borrowers and Lenders, Debtors and Creditors A country that is borrowing more from the rest of the world than it is lending to it is called a net borrower . A country that is lending more to the rest of the world than it is borrowing from it is called a net lender . The United States is currently a net borrower (but as late
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Ch183 - INTERNATIONAL FINANCE 18 CHAPTER Objectives After...

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