Chapter_2_Note

Chapter_2_Note - Chapter 2 Note A Balance of Payment (BOP)...

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Chapter 2 Note A Balance of Payment (BOP) is a summary of transactions between domestic and foreign residents for a specific country over a specified period of time. It measures all international economic transactions between the residents of this country and foreign residents. BOP is important to business managers and investors because they use BOP data to anticipate changes in host-country economic policies. BOP is also important for the following reasons: 1. BOP is an important indicator of pressure on a country’s foreign exchange rate; therefore indicating the potential for experiencing foreign exchange gains or losses 1 2. Change in BOP may signal the imposition or removal of controls over payment of dividends, interest, or other cash disbursements to foreign firms or investors 3. BOP data helps to forecast a country’s market potential, especially in the short- run 2 BOP ACCOUNTING Note on Slide 3 BOP consists of a number of subaccounts. Primary subaccounts include current account , capital account , and financial account. Note: on Slide 3, I grouped export with import into net export/import, and did the same to income receipts and income payment (called the group net income ). This differs a little from the current account presented in Figure 2.2 on page 25. Note on Slide 4 Current Account Current Account summarizes the flow of funds international economic transactions between one specific country and all other countries over a specified period of time, the current period. The economic transactions include 1. Trade on merchandise (good) and/or services Export of merchandise and service results in inflow of funds to the home country (e.g. United States); import of merchandise and services results in outflow of funds from the home country. The difference between export and import (i.e. total export – total import) is the net export/import , or balance of trade (BOT) . A negative BOT (BOT deficit) means less export than import; a positive BOT (BOT surplus) indicates export exceeds import. 1 In Lesson 1, we learned that value of a MNC is the sum of present values of future cash flows. Amount of future cash flows depend on 1). Cash flows firm’s operation generates, in local currency (for example, amount of Euro a MacDonald store in Paris) ; and 2) exchange rate that converts local currency to home currency (for example, exchange rate between Euro and dollar). If the latter increases (or decreases), the firm will experience a foreign exchange gain (or loss) 2 For example, a country that is experiencing a serious trade deficit is not likely to expand important; it would welcome investment to increase export
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2. Factor income
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This note was uploaded on 12/08/2011 for the course FSNA 415 taught by Professor Chengruhu during the Fall '11 term at SUNY Canton.

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Chapter_2_Note - Chapter 2 Note A Balance of Payment (BOP)...

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