1 C H A P T E R 2 International Flow of Funds

2 Chapter Overview A. Balance of Payments B. International Trade Flows C. International Trade Issues D. Factors Affecting International Trade Flows E.Correcting a Balance of Trade Deficit F. International Capital Flows G. Agencies That Facilitate International Flows

3 Chapter 2 Objectives This chapter will: A. Explain the key components of the balance of payment B. Explain how international trade flows are influenced by economic factors and other factors C. Explain how international capital flows are influenced by country characteristics

4 A. Balance of Payments 1. Current Account: a. Payments for merchandise and services b. Factor income payments c. Transfer payments

5 A. Balance of Payments 2. Capital and Financial Accounts a. Direct foreign investment (DFI) b. Portfolio investment c. Other d. Errors and Omissions and Reserves

6 B. International Trade Flows 1. Distribution of U.S. Exports and Imports 2. U.S. Balance of Trade (BOT) Trend 3. Should the U.S. be Concerned about a Huge BOT Deficit?

7 Insert Exhibit 2.4 from page Distribution of U.S. Exports and Imports

8 C. International Trade Issues 1. Events that Increased International Trade a. Removal of the Berlin Wall b. Single European Act c. NAFTA d. Inception of the Euro e. European Union Expansion

9 C. International Trade Issues 2. Trade Friction: Causes a. Using the exchange rate as policy b. Outsourcing c. Using trade and foreign ownership policies for security d. Using trade policies for political reasons

10 D. Factors Affecting International Trade Flows 1. Three Factors Affecting International Portfolio Investment a.Tax Rates on Interest or Dividends b.Interest Rates c.Exchange Rates

11 E. Correcting a Balance of Trade Deficit 1. Why a Weak Home Currency is Not a Perfect Solution a. Counterpricing by Competitors b. Impact of Other Weak Currencies c. Prearranged International Transactions: J-curve Effect d. Intercompany Trade

12 Insert exhibit 2.6 page 38 Insert exhibit 2.6 page 38 J-Curve Effect

13 F. International Capital Flows 1. Distribution of DFI by U.S. Firms 2. Distribution of DFI in the United States 3. Factors Affecting DFI a. Changes in Restrictions b. Privatization c. Potential Economic Growth d. Tax Rates e. Exchange Rates

14 Insert exhibit 2.7 page 39 International Capital Flows (quarterly numbers, annualized; in billions of $)

15 F. International Capital Flows 4. Impact of International Capital Flows Impact of the international Flow of Funds on U.S. Interest Rates and Business Investment in the United States

16 G. Agencies that Facilitate International Flows 1. International Monetary Funds 2. World Bank 3. World Trade Organization

17 G. Agencies that Facilitate International Flows 4. International Financial Corporation 5. International Development Association 6. Bank for International Settlements 7. Organization for Economic Cooperation and Development 8. Regional Development Agencies