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International Flow of Funds Overview

The document discusses the balance of payments, summarizing all international transactions of a country, divided into the current account and capital & financial accounts. It highlights factors affecting international trade flows, such as inflation, national income, government policies, and exchange rates, as well as methods for correcting trade deficits. Additionally, it covers factors influencing direct foreign investment (DFI) and international portfolio investment, including restrictions, economic growth potential, tax rates, and interest rates.

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5 views10 pages

International Flow of Funds Overview

The document discusses the balance of payments, summarizing all international transactions of a country, divided into the current account and capital & financial accounts. It highlights factors affecting international trade flows, such as inflation, national income, government policies, and exchange rates, as well as methods for correcting trade deficits. Additionally, it covers factors influencing direct foreign investment (DFI) and international portfolio investment, including restrictions, economic growth potential, tax rates, and interest rates.

Uploaded by

aiboot006
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

Chapter - 2

International Flow of Funds


BALANCE OF PAYMENTS
• Summary of all transactions between domestic and
foreign residents over a specified period of time.
• Represents an accounting of a country’s international
transactions for a period, usually a quarter or a year.
• Transaction recorded as:
– Credit: Inflows of funds generate positive numbers.
– Debit: Outflows of funds generate negative numbers.
• The transactions are presented in to two groups–
– Current Account
– Capital Account and Financial Account
BALANCE OF PAYMENTS
CURRENT ACCOUNT
• Summarizes the flow of funds between one specified
country and all other countries due to:
– Payments for Merchandise and Services
– Factor Income Payments
– Transfer Payments

• A current account deficit suggests a greater outflow of


funds from the specified country for its current
transactions.
• Balance of Trade: Difference between merchandise
exports and merchandise imports.
BALANCE OF PAYMENTS
CAPITAL & FINANCIAL ACCOUNTS
• Includes the value of financial and non-produced
nonfinancial assets transferred across country borders.
• Key components of the accounts:
– Patent
– Direct Foreign Investment
– Portfolio Investment
– Other Capital Investment (money market securities)

ERRORS & OMISSIONS AND RESERVES


FACTORS AFFECTING INTERNATIONAL TRADE FLOWS

• Inflation: A relative increase in a country’s inflation rate will


decrease its current account, as imports increase and exports
decrease.
• National Income: A relative increase in a country’s income
level will decrease its current account, as imports increase.
• Government Policies:
– Subsidies for Exporters
– Restrictions on Imports
– Lack of Restrictions on Piracy
• Exchange Rates: If a country’s currency begins to rise in
value, its current account balance will decrease as imports
increase and exports decrease.
CORRECTING A BALANCE OF TRADE DEFICIT

• A floating exchange rate system.


• Weakening of Home Currency.
CORRECTING A BALANCE OF TRADE DEFICIT
• Why a Weak Home Currency Is Not a Perfect
Solution?
– Counter pricing by Competitors.
– Impact of Other Weak Currencies.
– Prearranged International Transactions. (J-curve
effect)
– Intra-company Trade.
J-Curve Effect

BD Trade Balance

0 Time

J Curve
FACTORS AFFECTING DFI
• Changes in Restrictions: New opportunities may arise
from the removal of government barriers.
• Privatization: DFI has also been stimulated by the selling
of government operations.
• Potential Economic Growth: Countries with higher
potential economic growth are more likely to attract DFI.
• Tax Rates: Countries that impose relatively low tax rates
on corporate earnings are more likely to attract DFI.
• Exchange Rates: Firms will typically prefer to invest
their funds in a country when that country’s currency is
expected to strengthen.
Factors Affecting International Portfolio Investment

• Tax Rates on Interest or Dividends: Investors will


normally prefer countries where the tax rates are
relatively low.
• Interest Rates: Money tends to flow to countries
with high interest rates.
• Exchange Rates: Foreign investors may be attracted
if the local currency is expected to strengthen.

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