1. Chapter 2 International Flow of Funds

2. Balance of Payments 國際收支帳
a summary of transactions between domestic and foreign residents for a specific country over a specified period of time (usually a quarter or a year).

3. inflows of funds generate credits (貸方) for the country’s balance
outflows of funds generate debits (借方).

4. Current Account 經常帳
The current account summarizes the flow of funds between one specified country and all other countries due to purchases of goods or services, or the provision of income on financial assets.

5. Key components of the current account include
balance of trade 貿易收支(exports and imports of merchandise and service)
factor income (interest & dividends)
transfer payments (aids, gifts, & grants).

6. The U.S. Current Account in 2003
Exhibit 2.2 (in billions of $)
(1) U.S. exports of goods + $712
+ (2) U.S. exports of services + 292
+ (3) U.S. income receipts + 275
= (4) Total U.S. exports & income receipts = $1,279
(5) U.S. imports of goods – $1,263
+ (6) U.S. imports of services – 246
+ (7) U.S. income payments – 259
= (8) Total U.S. imports & income payments = $1,768
(9) Net transfers by the U.S. – $68
(10) Current account balance = (4) – (8) – (9) – $557

7. Capital Account
The capital account summarizes the flow of funds resulting from the sale of assets between one specified country and all other countries.

8. The key components of the capital account are
direct foreign investment: investment in fixed assets in foreign countries (firm expansion)
portfolio investment: transactions of long-term financial assets
other capital investment: transactions of short-term financial assets

9. International Trade Flows
Some countries are more dependent on trade than others.
The trade volume of a European country is typically between 30 ~ 40% of its GDP
The trade volume of U.S. and Japan is typically between 10 ~ 20% of its GDP.

10. U.S. Balance of Trade Over Time

11. Trade Agreements
Many agreements have been made to reduce trade restrictions:
1988 U.S. and Canada free trade pact
North American Free Trade Agreement (NAFTA)
General Agreement on Tariffs and Trade (GATT)
Single European Act and the European Union

12. Trade Disagreements
Even without tariffs and quotas, the strategies that can give local firms an edge in exporting:
environmental restrictions
labor laws
bribes to large customers
government subsidies (dumping)
tax breaks for specific industries

13. Trade Disagreements Other trade-related issues include:
exchange rate manipulations
the outsourcing of services
the use of trade policies for political reasons
disagreements within the European Union

14. Factors Affecting International Trade Flows
Impact of Inflation
Other things being equal, a relative increase in a country’s inflation rate will decrease its current account, as imports increase and exports decrease.

15. Impact of National Income
A relative increase in a country’s income level will decrease its current account, as imports increase.

16. Impact of Government Restrictions
A government may reduce its country’s imports by imposing a tariff on imported goods, or by enforcing a quota.
Some trade restrictions may be imposed on certain products for health and safety reasons (口蹄疫、禽流感等).

17. Impact of Exchange Rates
If a country’s currency begins to rise in value, its current account balance will decrease as imports increase and exports decrease.
Example (p44):
A tennis racket = $100 = C$125
C$1=$0.8
If C$1=0.7
Then the tennis racket =C$143

18. The factors interact, such that their simultaneous influence on the balance of trade is complex.

19. Correcting A Balance of Trade Deficit
If trade deficit exists severely, we need to increase foreign demand for our goods and services.
A floating exchange rate system may correct a trade imbalance automatically since the trade imbalance will affect the demand and supply of the currencies involved.

20. Why a Weak Home Currency Is Not a Perfect Solution
Counterpricing by competitors
Impact of other weak currencies
Prearranged international transactions
The lag time between a weaker U.S.$ and increased foreign demand has been estimated to be 18 months or longer.
Stability of intracompany trade
Many firms purchase products that are produced by their subsidiaries. (more than 50% of international trades)

21. The J-Curve Effect Time U.S. Trade Balance J Curve
Time
J Curve
Deterioration due to dollar depreciation
Change in purchasing power caused by weaker dollar

22. International Capital Flows
Factors Affecting DFI
Changes in Restrictions
New opportunities may arise from the removal of government barriers. (emerging markets)
Privatization
DFI has also been stimulated by the selling of government operations. (emerging markets)

23. Factors Affecting DFI Potential Economic Growth Tax Rates
Countries that have higher potential for economic growth are more attractive. (emerging markets)
Tax Rates
Countries that impose relatively low tax rates on corporate earnings are more likely to attract DFI.

24. Factors Affecting DFI Exchange Rates
Firms typically prefer to invest in countries where the local currency is expected to strengthen against their own.

25. 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.
Borrow from the countries with low interest rates

26. Exchange Rates
Foreign investors may be attracted if the local currency is expected to strengthen.

27. Agencies that Facilitate International Flows (self-study)
International Monetary Fund (IMF)
A result of Bretton Woods conference in 1944.
184 member countries
Compensatory financing facility (CFF)
Special drawing rights (SDRs)

28. World Bank
This International Bank for Reconstruction and Development makes loans to countries to enhance their economic development.
In particular, its Structural Adjustment Loans (SALs) are intended to enhance a country’s long-term economic growth.
Funds are spread through cofinancing agreements with official aid agencies, export credit agencies, and commercial banks.

29. Multilateral Investment Guarantee Agency
Established by the World Bank, the MIGA helps develop international trade and investment by offering various forms of political risk insurance.

30. World Trade Organization
The WTO was established to provide a forum for multilateral trade negotiations and to settle trade disputes related to the GATT accord.

31. International Financial Corporation
The IFC promotes private enterprise within countries through loan provisions and stock purchases.

32. International Development Association
The IDA extends loans at low interest rates to poor nations that cannot qualify for loans from the World Bank.
Bank for International Settlements
The BIS is the “central banks’ central bank” and “lender of last resort.”

33. Regional development agencies
Inter-American Development Bank
Asian Development Bank
African Development Bank
European Bank for Reconstruction and Development.

34. Dilemma
The helps from those organizations aim to promote the global financial stability.
However, some nations may rely too much on them, so it may lead to low quality decision production.