ECONOMICSFINANCE 372

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ECONOMICS/FINANCE 372 International Finance
Course Objective To develop an understanding of
the significance that the existence of different
currencies around the world has on economic and
financial activity. The causes and effects of
exchange rate behavior will be investigated. As
in any economics course, the effects of
government policies and the role of government
are considered. As in any finance course, the
profound influence that uncertainty (a.k.a. risk)
has on economic and financial behavior is
emphasized.
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The Balance of Payments (BOP) Accounts A record
of all economic activity that flows between
residents of a country and residents of the rest
of the world in a given period of time (e.g., a
year), where all values are in terms of the
countrys own currency.
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The two primary component accounts of the BOP
accounts are 1) the Financial Account (formerly
known as the Capital Account) 2) the
Current Account. All transfers of asset
ownership are recorded in the Financial Account.
All other flows (e.g., of goods, services)
across the countrys borders are recorded in the
Current Account.
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BOP accounting employs double-entry bookkeeping
For every credit there is a debit, and
For every debit there is a credit.
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Credits in the CA a flow (of goods or services)
that gives rise to a payment inward from a
non-resident. Debits in the CA a flow (of
goods or services) that gives rise to a payment
outward to a non-resident. Credits in the
FA the transfer of the ownership of an asset
from a resident to a nonresident. Debits in the
FA the transfer of the ownership of an asset
from a nonresident to a resident.
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Current Account (CA) is divided into 3
sub-accounts The goods account (CAG)
records the flows of goods (across the
borders) The services account (CAS) records the
flows of services The factor services account
(CAFS) records the flows of factor services.  
CA CAG CAS CAFS
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Financial Account (FA) is also divided into 3
sub-accounts The long term, private financial
account (FALTP) records the flows of the transfer
of ownership across the border of long-term
assets by private individuals and institutions.
The short-term, private financial account
(FASTP) records the transfer of short-term assets
by private individuals and institutions. The
government financial account (FAGOV) records the
acquisition or sale of another countrys currency
by the countrys monetary authority. FA
FALTP FASTP FAGOV
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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit



FALTP FASTP
FAGOV

Debit Credit Debit
Credit Debit Credit

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There are several Key Balances that are
constructed using these six sub-accounts Trade
Balance CAG Basic Balance CA
FALTP Official Reserves Transactions Balance
(ORTB)(a.k.a. Overall Balance, or, Official
Settlements Balance, or, The Balance of
Payments or BOP) CA FALTP
FASTP FAPRIVATE FALTP FASTP
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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit



FALTP FASTP
FAGOV

Debit Credit Debit
Credit Debit Credit

A US resident pays a Canadian 10 in exchange for
preparing her taxes, paying with a check on a
Chicago bank.
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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit
10

FALTP FASTP
FAGOV
Debit Credit Debit
Credit Debit Credit

Tax preparation (10 worth) is provided by the
Canadian accountant to the US resident
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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit
10


FALTP FASTP
FAGOV
Debit Credit Debit
Credit Debit Credit
10
The US resident gives the Canadian a check for 10
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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit
10


FALTP FASTP
FAGOV
Debit Credit Debit
Credit Debit Credit
10
Key Balances The CURRENT ACCOUNT (CA) -10
(is in deficit by 10)
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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit
10


FALTP FASTP
FAGOV
Debit Credit Debit
Credit Debit Credit
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Key Balances The FINANCIAL ACCOUNT (FA) 10
(is in surplus by 10)
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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit
10


FALTP FASTP
FAGOV
Debit Credit Debit
Credit Debit Credit
10
Key Balances The BASIC BALANCE (BB) CA
FALTP -10
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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit
10


FALTP FASTP
FAGOV
Debit Credit Debit
Credit Debit Credit
10
Key Balances The (Merchandise) TRADE BALANCE
(TB) CAG 0
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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit
10


FALTP FASTP
FAGOV
Debit Credit Debit
Credit Debit Credit
10
Key Balances The BALANCE OF PAYMENTS (BOP) CA
FALTP FASTP
0
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A UK resident buys a 5-yr US government bond
(from an American) for 20, pays with a check on
a British bank.

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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit
10


FALTP FASTP
FAGOV
Debit Credit Debit
Credit Debit Credit
20 10

The British resident gives the 20 check to the
American.
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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit
10


FALTP FASTP
FAGOV
Debit Credit Debit
Credit Debit Credit
20 20 10

The British resident gives the 20 check to the
American.
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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit
10


FALTP FASTP
FAGOV
Debit Credit Debit
Credit Debit Credit
20 20 10

CA -10 FA 10 BB 10 BOP
0 TB 0
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A US resident receives 30 in interest payments
on her 6-mo Peruvian bonds, paid with a check on
a Peruvian bank.
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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit
10
30

FALTP FASTP
FAGOV
Debit Credit Debit
Credit Debit Credit
20 20 10

A US resident provides services to the Peruvian
borrower worth 30.
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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit
10
30

FALTP FASTP
FAGOV
Debit Credit Debit
Credit Debit Credit
20 20 10
30

A US resident receives the 30 check on the
Peruvian bank.
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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit
10
30

FALTP FASTP
FAGOV
Debit Credit Debit
Credit Debit Credit
20 20 10
30


FASTP - 40 (is in deficit by 40)
CA 20 FA -20 BB 40 BOP 0
TB 0
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US Government buys 40 worth of Yen in the
foreign exchange markets with newly printed s.

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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit
10
30

FALTP FASTP
FAGOV
Debit Credit Debit
Credit Debit Credit
20 20 10 40
30
US Government puts 40 worth of Yen in its vault.
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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit
10
30

FALTP FASTP
FAGOV
Debit Credit Debit
Credit Debit Credit
20 20 10 40
30 40

A foreign resident takes possession of 40 newly
printed s.
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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit
10
30

FALTP FASTP
FAGOV
Debit Credit Debit
Credit Debit Credit
20 20 10 40
30 40

FASTP 0 (is in balance)
CA 20 FA -20 BB 40 BOP 40
TB 0
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A US resident pays 50 for a 180-day Japanese
government security, pays with a Houston bank
check.
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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit
10
30

FALTP FASTP
FAGOV
Debit Credit Debit
Credit Debit Credit
20 20 10 40
30 40
50
A US resident takes ownership of the 180-day
Japanese government security (worth 50).
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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit
10
30

FALTP FASTP
FAGOV
Debit Credit Debit
Credit Debit Credit
20 20 10 40
30 40
50 50
The Japanese government takes possession of the
50 check on the US bank from the US resident.
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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit
10
30

FALTP FASTP
FAGOV
Debit Credit Debit
Credit Debit Credit
20 20 10 40
30 40
50 50
FASTP 0 CA 20 FA -20 BB 40
BOP 40
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US firm sells 60 in lumber to Taiwan firm and is
paid with a check on the Taiwans firm account in
a US bank.
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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit
60 10
30

FALTP FASTP
FAGOV
Debit Credit Debit
Credit Debit Credit
20 20 10 40
30 40
50 50
US firm delivers 60 in lumber to Taiwan firm.
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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit
60 10
30

FALTP FASTP
FAGOV
Debit Credit Debit
Credit Debit Credit
20 20 10 40
30 40
50 50
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The Taiwan firm gives the check for 60 on the US
bank to the US seller.
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CAG CAS
CAFS

Debit Credit Debit
Credit Debit Credit
60 10
30

FALTP FASTP
FAGOV
Debit Credit Debit
Credit Debit Credit
20 20 10 40
30 40
50 50
60
CA 80 FA -80
FASTP -60 BB 100 BOP 40 TB 60
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1. A US resident pays a Canadian 10 in exchange
for preparing her taxes, paying with a check on a
Chicago bank. 2. A UK resident buys a 5-yr US
government bond (from an American) for 20, pays
with a check on a British bank. 3. A US resident
receives 30 in interest payments on her 6-mo
Peruvian bonds, paid with a check on a Peruvian
bank. 4. US Government buys 40 worth of Yen in
the foreign exchange markets with newly printed
s. 5. A US resident pays 50 for a 180-day
Japanese government security, pays with a Houston
bank check. 6. US firm sells 60 in lumber to
Taiwan firm and is paid with a check on the
Taiwans firm account in a US bank.
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