Ch02-VersC.ppt

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International Flow of Funds

_{International Flow of Funds}

2

ChapterChapter

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Chapter Objectives

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To explain the key components of the

balance of payments; and

•

To explain how the international flow of

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Balance of Payments

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The balance of payments is a measurement of all transactions between domestic and foreign residents over a specified period of time.

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Each transaction is recorded as both a credit and a debit, i.e. double-entry bookkeeping.

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The current account summarizes the flow of funds between one specified country and all other

countries due to the purchases of goods or services, the provision of income on financial assets, or unilateral current transfers (e.g.

government grants and pensions, private remittances).

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A current account deficit suggests a greater

outflow of funds from the specified country for its

current transactions.

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Summary of U.S. International Transactions

Exports of goods and services and income receipts 1418568 Goods, balance of payments basis 772210

Services 293492

Income receipts 352866

Imports of goods and services and income receipts -1809099 Goods, balance of payments basis -1224417

Services -217024

Income payments -367658

Unilateral current transfers, net -54136

Balance on current account -444667

(For the Year of 2000 in Millions of Dollars)

Current Account

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The current account is commonly used to

assess the balance of trade, which is simply

the difference between merchandise exports and merchandise imports.

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The new capital account (as defined in the

1993 System of National Accounts and the

fifth edition of IMF’s Balance of Payments

Manual) is adopted by the U.S. in 1999.

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It includes unilateral current transfers that are really shifts in assets, not current

income. E.g. debt forgiveness, transfers by immigrants, the sale or purchase of rights to natural resources or patents.

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Summary of U.S. International Transactions

Capital account transactions, net 705

Capital Account

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The financial account (which was called the

capital account previously) summarizes the flow of funds resulting from the sale of

assets between one specified country and all other countries.

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Assets include official reserves, other government assets, direct foreign

investments, investments in securities, etc.

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Summary of U.S. International Transactions

U.S.-owned assets abroad, net (increase/financial outflow) -580952 U.S. official reserve assets, net -290

Other U.S. Gov’t assets, net -944 U.S. private assets, net -579718 Foreign-owned assets in the U.S., net (increase/financial inflow) 1024218

Foreign official assets in the U.S., net 37619 Other foreign assets in the U.S., net 986599

Net financial flows 443266

Statistical discrepancy (sum of items in all accounts with sign reversed) 696

Financial Account

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The U.S. balance of payments and related data are disseminated by the Bureau of Economic Analysis.

Visit the Bureau at http://www.bea.doc.gov.

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For a snapshot of the latest international

trade conditions, visit the White House’s Economic Statistics Briefing Room at

www.whitehouse.gov/fsbr/international.html.

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Different countries rely on trade to different extents.

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The trade volume of European countries is

typically between 30 – 40% of their respective GDP, while the trade volume of U.S. and

Japan is typically between 10 – 20% of their respective GDP.

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Nevertheless, the volume of trade has grown over time for most countries.

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Distribution of

U.S. Exports

and Imports

For the Year of 2000 (exports, imports)

in Billions of $

Source: U.S. Census Bureau Canada (179,231) Mexico (111,136) Colombia (4,7) Ecuador (1,2) Peru (2,2) Chile (3,3) Venezuela (6,19) Brazil (15,14) Argentina (5,3) Bahamas (1,0)

Costa Rica (2,4)

Dominican Republic (4,4) El Salvador (2,2)

Jamaica (1,1)

Panama (2,0) Guatemala

(2,3) Honduras (3,3)

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Distribution of U.S. Exports and Imports

(exports, imports) in Billions of $ for the Year of 2000

Austria (3,3) Belgium (14,10) Czech Republic (1,1) Denmark (2,3) Germany (29,59) Italy (11,25) Ireland (8,16) United Kingdom (42,43) Russia (2,8) Finland (2,3) Sweden (5,10) Norway (2,6) Netherlands (22,10) Poland (1,1) Portugal (1,2) Spain (6,6) Hungary (1,3) France (20,30) Switzerland (10,10) Turkey (4,3) Greece (1,1)

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Algeria (1,3)

Angola (0,4)

Egypt (3,1)

South Africa (3,4) Nigeria (1,11)

Gabon (0,2)

Source: U.S. Census Bureau

Distribution of

U.S. Exports

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Australia (12,6) Bangladesh (0,2) China (16,100) United Arab Emirates (2,1) New Zealand (2,2) Japan (65,146) South Korea (28,40) Taiwan (24,41) Philippines (9,14) Indonesia (2,10) Hong Kong (15,11) India (4,11) Iraq (0,6) Israel (8,13) Kuwait (1,3) Macao (0,1) Malaysia (11,26) Pakistan (0,2) Saudi Arabia (6,14) Singapore (18,19) Sri Lanka (0,2) Thailand (7,16)

Source: U.S. Census Bureau

Distribution of

U.S. Exports

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Distribution of U.S. Exports and Imports

For the Year of 2000 in Billions of $

Source: U.S. Office of Trade and Economic Analysis

Australasia 14.8 1.9%

Canada 178.8 22.8% Mexico 111.7 14.3% Other America 59.3

7.6% Eastern Europe_{6.1 0.8%} _23.2%181.3 Western_Europe 11.0 1.4% Africa 27.6 2.3% 148.5 19.0% East Asia 340.3 28.0% South East Asia 47.4 6.1% Other Asia

23.6 3.0%

Canada 229.2 18.8% Mexico 135.9 11.2% Other America 73.3 6.0% Eastern Europe

16.2 1.3% 241.0

19.8% 88.0 7.2%

Other Asia

56.5 4.6% Australasia8.8 0.7%

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International Trade Flows

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In 1975, the U.S. exported $107.1 billions in goods, and imported $98.2 billions. Since then, international trade has grown, with

U.S. exports and imports of goods valued at $773.3 and $1,222.8 billions respectively for the year of 2000.

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Since 1976, the value of U.S. imports has

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U.S. Balance of Trade Trend

-500 -300 -100 100 300 500 700 900 1100 1300

1960 1965 1970 1975 1980 1985 1990 1995 2000

B il lio n s o f U S $ U.S. Imports U.S. Exports

U.S. Balance of Trade

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For more U.S. trade-related statistics,

visit:

¤ http://www.census.gov/foreign-trade/www/ ¤ http://www.ita.doc.gov/td/industry/otea/

•

For worldwide trade statistics, visit:

¤ http://www.wto.org/english/res_e/statis_e/

statis_e.htm

¤ http://www.worldbank.org/data/

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Recent Changes in North American Trade

¤ In 1998, a 1989 free trade pact between U.S. and

Canada was fully phased in.

¤ Passed in 1993, the North American Free Trade

Agreement (NAFTA) removes numerous trade restrictions among Canada, Mexico, and the U.S.

¤ _{In 2001, trade negotiations were initiated for a}

free trade area of the Americas. 34 countries are involved.

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Recent Changes in European Trade

¤ _{The Single European Act of 1987 was}

implemented to remove explicit and implicit trade barriers among European countries.

¤ Consumers in Eastern Europe now have

more freedom to purchase imported goods.

¤ The single currency system implemented in

1999 eliminated the need to convert

currencies among participating countries.

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Trade Agreements Around the World

¤ In 1993, a General Agreement on Tariffs and

Trade (GATT) accord calling for lower tariffs was made among 117 countries.

¤ Other trade agreements include:

Association of Southeast Asian Nations European Community

Central American Common Market

North American Free Trade Agreement

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Friction Surrounding Trade Agreements

¤ _{Trade agreements are sometimes broken}

when one country is harmed by another country’s actions.

¤ Dumping refers to the exporting of products

by one country to other countries at prices below cost.

¤ Another situation that can break a trade

agreement is copyright piracy.

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To learn more about the various trade

agreements around the world, visit:

¤ http://www1.worldbank.org/wbiep

/trade/RI_map.html

¤ http://www.worldbank.org/data/wdi2001/

pdfs/tab6_5.pdf

¤ http://www.sice.oas.org/tradee.asp

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Factors Affecting

International Trade Flows

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Inflation

¤ A relative increase in a country’s inflation

rate will decrease its current account, as imports increase and exports decrease.

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National Income

¤ _{A relative increase in a country’s income}

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Government Restrictions

¤ A government may reduce its country’s

imports by imposing tariffs on imported goods, or by enforcing a quota. Note that other countries may retaliate by imposing their own trade restrictions.

¤ Sometimes though, trade restrictions may

be imposed on certain products for health and safety reasons.

Factors Affecting

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Exchange Rates

¤ If a country’s currency begins to rise in

value, its current account balance will

decrease as imports increase and exports decrease.

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Note that the factors are interactive, such

that their simultaneous influence on the balance of trade is a complex one.

Factors Affecting

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Correcting

A Balance of Trade Deficit

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By reconsidering the factors that affect

the balance of trade, some common correction methods can be developed.

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For example, a floating exchange rate

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However, a weak home currency may not

necessarily improve a trade deficit.

¤ _{Foreign companies may lower their prices to}

maintain their competitiveness.

¤ Some other currencies may weaken too.

¤ _{Many trade transactions are prearranged and}

cannot be adjusted immediately. This is known as the J-curve effect.

¤ The impact of exchange rate movements on

intracompany trade is limited.

Correcting

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J-Curve Effect

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Capital flows usually represent portfolio

investment or direct foreign investment.

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The DFI positions inside and outside the

U.S. have risen substantially over time, indicating increasing globalization.

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In particular, both DFI positions increased

during periods of strong economic growth.

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Direct Foreign Investment Positions

Source: U.S. Bureau of Economic Analysis

B il lio n s o f U S $ 0 200 400 600 800 1000 1200 1400

1980 1985 1990 1995 2000

DFI by U.S. Firms

DFI in the U.S.

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Distribution of DFI for the U.S.

For the Year of 2000

Source: U.S. Bureau of Economic Analysis

DFI by U.S. Firms DFI in the U.S.

Canada 10.2%

Other Western Hemisphere 19.2% 3.4%

Canada 8.1% France 3.1% Germany 4.3% United Kingdom 18.8% Other Europe 16.6% Africa 1.3% Middle East 1.0% Japan 4.5% Other Asia & Pacific 11.6% Other Asia & Pacific 2.5% France 9.6% Germany 9.9% Netherlands 9.3% 12.3%

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Factors Affecting DFI

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Changes in Restrictions

¤ New opportunities may arise from the removal

of government barriers.

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Privatization

¤ _{DFI has also been stimulated by the selling of}

government operations.

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Potential Economic Growth

¤ Countries with higher potential economic

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Tax Rates

¤ Countries that impose relatively low tax

rates on corporate earnings are more likely to attract DFI.

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Exchange Rates

¤ _{Firms will typically prefer to invest their}

funds in a country when that country’s currency is expected to strengthen.

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Factors Affecting

International Portfolio Investment

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Tax Rates on Interest or Dividends

¤ Investors will normally prefer countries where

the tax rates are relatively low.

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Interest Rates

¤ _{Money tends to flow to countries with high}

interest rates.

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Exchange Rates

¤ Foreign investors may be attracted if the local

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Which countries should you invest in?

Online Application

¤ _{Consult the}_{Country Commercial}

Guides prepared by embassy staff at

http://www.usatrade.gov/website/ccg. nsf/ccghomepage?openform

¤ _{Visit the Trade Information Center at}

http://www.trade.gov/td/tic/

¤ _{Visit the Yahoo! International Finance Center}

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C2 - 40 International Monetary Fund (IMF)

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The IMF is an organization of 183 member countries. Established in 1946, it aims

¤ _{to promote international monetary}

cooperation and exchange stability;

¤ _{to foster economic growth and high levels of}

employment; and

¤ to provide temporary financial assistance to

help ease imbalances of payments.

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In particular, its compensatory financing

facility attempts to reduce the impact of

export instability on country economies.

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The IMF uses a quota system, and its unit of account is the SDR (special drawing right).

Agencies that Facilitate

International Flows

International Monetary Fund (IMF)

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Its operations involve surveillance, and

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The weights assigned to the currencies in

the SDR basket are as follows:

Currency 2001 Revision 1996 Revision

U.S. dollar 45 39

Euro 29

Deutsche mark 21

French franc 11

Japanese yen 15 18

Pound sterling 11 11

International Monetary Fund (IMF)

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You may learn more about the IMF at

http://www.imf.org.

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World Bank Group

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Established in 1944, the Group assists

development with the primary focus of helping the poorest people and the

poorest countries.

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It has 183 member countries, and is

composed of five organizations - IBRD, IDA, IFC, MIGA and ICSID.

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IBRD: International Bank for Reconstruction and Development

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Better known as the World Bank, the IBRD provides loans and development assistance to middle-income countries and creditworthy poorer countries.

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In particular, its structural adjustment loans

are intended to enhance a country’s long-term economic growth.

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cofinancing agreements with official aid agencies,

export credit agencies, as well as commercial banks.

Agencies that Facilitate

International Flows

IBRD: International Bank for

Reconstruction and Development

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The IBRD is not a profit-maximizing

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IDA: International Development Association

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IDA was set up in 1960 as an agency that lends to the very poor developing nations on highly concessional terms.

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IDA lends only to those countries that lack the financial ability to borrow from IBRD.

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IBRD and IDA are run on the same lines, sharing the same staff, headquarters and project evaluation standards.

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C2 - 48 IFC: International Finance Corporation

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The IFC was set up in 1956 to promote sustainable private sector investment in developing countries, by

¤ financing private sector projects; ¤ _{helping to mobilize financing in the}

international financial markets; and

¤ providing advice and technical assistance to

businesses and governments.

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MIGA: Multilateral Investment Guarantee

Agency

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The MIGA was created in 1988 to promote

FDI in emerging economies, by

¤ offering political risk insurance to investors

and lenders; and

¤ helping developing countries attract and

retain private investment.

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ICSID: International Centre for Settlement

of Investment Disputes

•

The ICSID was created in 1966 to facilitate

the settlement of investment disputes between governments and foreign

investors, thereby helping to promote increased flows of international

investment.

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•

To learn more about the World Bank

Group and its organizations, visit:

¤ http://www.worldbank.org

¤ http://www.worldbank.org/ibrd ¤ _{http://www.worldbank.org/ida} ¤ http://www.ifc.org

¤ http://www.miga.org

¤ http://www.worldbank.org/icsid

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World Trade Organization (WTO)

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Created in 1995, the WTO is the successor to the General Agreement on Tariffs and Trade (GATT).

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It deals with the global rules of trade between nations to ensure that trade flows smoothly, predictably and freely.

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At the heart of the WTO's multilateral trading

system are its trade agreements.

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Its functions include:

¤ administering WTO trade agreements; ¤ serving as a forum for trade negotiations; ¤ handling trade disputes;

¤ monitoring national trading policies;

¤ _{providing technical assistance and training for}

developing countries; and

¤ cooperating with other international groups.

Agencies that Facilitate

International Flows

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Bank for International Settlements (BIS)

•

Set up in 1930, the BIS is an international

organization that fosters cooperation

among central banks and other agencies in pursuit of monetary and financial

stability.

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It is the “central banks’ central bank” and

“lender of last resort.”

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The BIS functions as:

¤ _{a forum for international monetary and financial}

cooperation;

¤ _{a bank for central banks;}

¤ a center for monetary and economic research;

and

¤ _{an agent or trustee in connection with}

international financial operations.

Agencies that Facilitate

International Flows

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To learn more about the WTO and the BIS,

visit:

¤ http://www.wto.org ¤ http://www.bis.org

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Regional Development Agencies

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Agencies with more regional objectives

relating to economic development include

¤ the Inter-American Development Bank; ¤ _{the Asian Development Bank;}

¤ the African Development Bank; and

¤ _{the European Bank for Reconstruction and}

Development.

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Check out the following regional agencies:

¤ _{Inter-American Development Bank:}

http://www.iadb.org

¤ _{Asian Development Bank:}

http://www.adb.org

¤ _{African Development Bank:}

http://www.afdb.org

¤ _{European Bank for Reconstruction and}

Development: http://www.ebrd.com

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Impact of International Trade on an MNC’s Value



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               n t t m j t j t j k 1 = 1 , , 1 ER E CF E = Value

E (CF_j,t) = expected cash flows in currency j to be received by the U.S. parent at the end of

period t

E (ER_j,t) = expected exchange rate at which

currency j can be converted to dollars at the end of period t

k = weighted average cost of capital of the parent

Exchange Rate Movements Inflation in Foreign Countries National Income in Foreign Countries

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Balance of Payments

¤ Current, Capital, and Financial Accounts

•

International Trade Flows

¤ Distribution of U.S. Exports and Imports ¤ U.S. Balance of Trade Trend

¤ _{Recent Changes in North American and}

European Trade

¤ Trade Agreements Around the World

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Chapter Review

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Factors Affecting International Trade

Flows

¤ Inflation

¤ National Income

¤ _{Government Restrictions} ¤ Exchange Rates

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Chapter Review

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Correcting a Balance of Trade Deficit

¤ Why a Weak Home Currency is Not A Perfect

Solution

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International Capital Flows

¤ Distribution of DFI by U.S. Firms ¤ Distribution of DFI in the U.S.

¤ Factors Affecting DFI

¤ Factors Affecting International Portfolio

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Chapter Review

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Agencies that Facilitate International Flows

¤ International Monetary Fund (IMF)

¤ World Bank Group

¤ World Trade Organization (WTO)

¤ Bank for International Settlements (BIS)

¤ Regional Development Agencies