1. Slide 1 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson

2. Slide 2 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson Balance of Payments page 39 F The Current Account F The Capital Account Exchange Rate IMF and the World Bank Chapter 2

3. Slide 3 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson F “A measurement of all transactions between domestic and foreign residents over a period of time” Madura page 39

4. Slide 4 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson Balance of Payments u Current account –balance of goods and services F net trade + interest and dividend payments –unilateral transfers imports exports Measure of all transactions between Measure of all transactions between domestic and foreign residents

5. Slide 5 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson F BOP accounts provide a system for documenting economic transactions during a given period between 2 countries F A BOP statement documents a country’s past economic transactions with other countries - like a “national” chequing account balance book - like a “national” chequing account balance book

6. Slide 6 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson F 2 basic concepts F 1. The statement is made up of balances, which show either surplus or deficit F 2. The total statement must be a balance

7. Slide 7 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson Statements are in 4 major Sections u 1. The Current Account - imports and exports of goods and services u 2. The Capital Account - investments and loans u 3. Errors and Omissions u 4. The Official Reserve Account - changes in response to the surpluses or deficits in the Current and Capital Account page 85 & 86 in text

8. Slide 8 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson u Explanation of Balances 5 categories 1. Balance of Trade - imports and exports of JUST goods 2. Balance of Goods and Services 3. Current Account - goods & services + short term capital transfers 4. Basic Balance - goods & services + long term capital transfers 5. The Official Settlements Account - changes in response to the surpluses or deficits in the Current and Capital Account 5. The Official Settlements Account - changes in response to the surpluses or deficits in the Current and Capital Account

9. Slide 9 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson Careful analysis of a Country’s BOP statements should be made before considering doing business in the country. This information can help you evaluate risk.

10. Slide 10 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson Balance of Payments Trends in Trade u NAFTA: –free trade block of US, Canada and Mexico u European trade –Single European Act F increased intra-european trade –eastern european trade changes F importing larger amounts of goods and services u Trade agreements around the world

11. Slide 11 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson Balance of Payments Trends in Trade u GATT trade agreement –117 countries agreed to lower tariffs –trade barriers slowly eliminated until year 2000 u European capital flow –much capital shifting to eastern Europe –German reunification F redirection of funds increased US interest rates

12. Slide 12 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson Factors affecting Current Account u 1. Inflation –higher rates relative to other countries affects trade F increased imports and decreased exports u 2. National income –increases (decreases) relative to other countries F current account decreases (increases) F greater wealth implies greater need for foreign goods

13. Slide 13 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson Factors affecting Current Account u 3. Government restrictions –tariff (tax on imported goods) F increases prices & lowers demand on imported goods F increases current account of the country F US tariffs on apparel and farm products F tariffs imposed in different countries on a case of imported beer: –US: $0.1235, Europe: $2.93, China: $14.64

14. Slide 14 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson Factors affecting Current Account u 4. Exchange rates –a currency valued in terms of another currency –increase in exchange rate suggests decrease in current account F exported goods would cost more, thus decreasing demand for the good F assumes price-elastic goods (sensitive to price changes)

15. Slide 15 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson History Currency value used to be based on stock of gold the government held in central bank. This was the Fixed Exchange Rate System Problems developed when money was printed, and not backed by gold In 1976 the world changed to a Floating Exchange Rate System

16. Slide 16 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson Floating Exchange Rate System u this system determines the value of a currency according to the demand for it, and the supply on the international 4X markets F clean float - no government intervention F dirty float - government intervention u current system is managed rates, not exactly free floating u small economies tie their rate to major trading partners u ie. Hong Kong dollar used to be “pegged” at 6 HK$ to 1 US$

17. Slide 17 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson 181 countries - promotes int’l monetary cooperation MAIN PURPOSES u facilitate the expansion and balanced growth of int’l trade u promote currency exchange stability u establishment of multilateral system of payments u help countries with temporary balance of payments difficulties http://www.imf.org/external/np/exr/facts/glance.htm

18. Slide 18 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson 181 countries - promotes int’l monetary cooperation MAIN ACTIVITY u Lends money to members who have trouble meeting financial obligations - BUT, only on the condition that they undertake economic reforms to eliminate these difficulties for their own good. http://www.imf.org/external/np/exr/facts/glance.htm

19. Slide 19 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson 181 countries - promotes int’l monetary cooperation Key Duties u CFF - Compensatory Financing Facility u purpose is to reduce the impact of export instability on country economies

20. Slide 20 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson Areas of Activity u Surveillance F It appraises its members exchange rate policies F Analyses their general economic situation u Financial assistance to IMF member countries u Technical assistance F re: fiscal and monetary policy http://www.imf.org/external/np/exr/facts/glance.htm

21. Slide 21 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson ORIGINS: Official name: International Bank for Reconstruction and Development Founded to help reconstruct European Countries after WW II http://www.worldbank.org

22. Slide 22 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson Activities: Today it is involved in development aid for poor countries Lends money for long-term development projects. Works with the IMF to resolve debt problems in the Developing World Has made mistakes in giving money to corrupt regimes. Made environmental mistakes ie. Gave money for a highway through Brazilian jungle.

23. Slide 23 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson Activities: In situations where war has ended, the World Bank acts to facilitate the transition to sustainable peace after hostilities cease and to support economic and social development.

24. Slide 24 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson World Investment Flows - Portfolio Investment F stocks, bonds, securities, T-bills - Direct Investment F mfg. plants, warehouses, processing operations, representative offices

25. Slide 25 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson Why FDI Exits u Land, Resources and some types of business cannot be relocated u If a company wants access, they have to go there F eg. Mining operations, forest harvesting u If your customer moves overseas, you may follow to continue to be able to supply F eg. Autoparts companies

26. Slide 26 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson Why FDI Exits u Some companies set up operations overseas because manufacturing locally is cheaper than exporting and paying the shipping costs u Companies also setup mfg. Overseas in low-wage areas to make products that are then sent back to customers in the Home Country, or to a 3rd market F eg. Japanese companies mfg. Electronic goods in Malaysia, and export to the USA

27. Slide 27 Slides developed by Jeff Madura, with additions and enhancements by Tim Richardson Concerns of the Host Country u Jobs for citizens u Additional taxes u Technology u Attraction to other types of companies u loss of economic control u vulnerability to employment crisis if co. leaves