Chapter 2 International Flow of Funds

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Chapter 2 International Flow of Funds

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International Flow of Funds

• What do we mean by flow of funds?
• What activities generate fund flows?

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International Flow of Funds

• How is the flow of funds measured?
• What is the definition of balance of payments
  (BOP)?
• The BOP is a record of a countrys international
  transactions over a period of time. It is based
  on a system of double-entry bookkeeping.
• Debits credits, Inflows outflows

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Components of Balance of Payment Statement

• Current Account
• Merchandise exports and imports (merchandise
  trade balance)
• Service exports and imports
• Factor income interest and dividends on
  investments made in prior periods
• Unilateral transfers
• Capital Account
• DFI in the U.S.
• DFI by U.S. firms
• Portfolio investments and by the U.S.

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Components of Balance of Payment Statement

• Official Reserves Account
• Changes in holdings of gold, currencies and other
  reserve assets held my monetary authorities
• Notes
• The BOP must balance i.e debitscredits
• Generally speaking, if the current account is
  in deficit, capital account must be in surplus
  and vice versa.
• Statistical discrepancy/errors and omissions

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Components of Balance of Payment Statement

• Why is the BOP important?
• Has implications for the currencys value
• May signal business prospects persistent
  deficits may undermine the countrys ability to
  attract investment

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Factors Affecting Current Account Balance

• Inflation differentials
• National income

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Factors Affecting Current Account Balance

• Exchange rates
• Generally speaking, currency depreciation should
  have a
• ______ impact on the current account balance
• J Curve Effect

0
Time
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Factors Affecting Current Account Balance

• Government restrictions
• Tariffs
• Quotas
• Taxes, restrictions on capital flows

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International Organizations

• IMF
• World Bank
• WTO
• IFC
• BIS

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Summary

• International trade generates significant flow of
  funds
• The flow of funds is measured using the balance
  of payments (BOP)
• The BOP has three major components
• The BOP is affected by many different factors
• The BOP has implications for economic activity