CH_2_lectnotes_SP11 - Chapter 2: International Flow of...

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International Flow of Funds This chapter studies the international flow of funds that results from international transactions by individuals, businesses, and governments. Balance of payments – a statistical (accounting) record of a specific country’s transactions with the rest of the world over a certain period of time. o Credits are associated with cash inflows (e.g., exports) o Debits are associated with outflows (e.g., imports, dividends paid to foreigners) o Micro (one country) and Macro (rest of world) oriented There are at least 4 reasons why the balance of payments is worth studying. 1. The balance of payments provides information concerning the demand and supply of a country’s currency. 2. A country’s balance of payments data may signal its potential as a business partner for the rest of the world. 3. Balance of payments data can be used to evaluate the performance of a country in international economic competition. 4. Helps evaluate how dependent a country’s economy is on its ability to export goods. There are 2 main components of balance of payments accounting – 1. Current Account – summarizes the flow of funds due to purchases of goods (merchandise) or services or the payment of income on financial assets. (TOP) 2. Capital Account – summarizes the flow of funds resulting from the sale of assets. (BOTTOM) o And 2 other (lesser)components – 3. Statistical discrepancy — represents omitted or misrecorded transactions 4. The official reserve account – includes transactions undertaken by the central bank (Federal Reserve in the U.S.) to finance the overall balance and intervene in foreign exchange markets. The Current Account covers 3 main areas 1. Balance of trade – the difference between a country’s exports of goods and services and its imports of goods and services. The “trade balance” usually pertains to exports and imports of only goods. 1
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This note was uploaded on 03/01/2012 for the course FINANCE 780 taught by Professor Scott during the Spring '12 term at Missouri State University-Springfield.

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CH_2_lectnotes_SP11 - Chapter 2: International Flow of...

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