11

C H A P T E R 2C H A P T E R 2

International Flow of FundsInternational Flow of Funds

22

Chapter OverviewChapter Overview

A. Balance of PaymentsA. Balance of PaymentsB. International Trade FlowsB. International Trade FlowsC. International Trade IssuesC. International Trade IssuesD. Factors Affecting International Trade D. Factors Affecting International Trade

FlowsFlowsE.E. Correcting a Balance of Trade DeficitCorrecting a Balance of Trade DeficitF. International Capital FlowsF. International Capital FlowsG. Agencies That Facilitate InternationalG. Agencies That Facilitate International

Flows Flows

33

Chapter 2 ObjectivesChapter 2 Objectives

This chapter will:This chapter will:A. Explain the key components of the A. Explain the key components of the

balance of paymentbalance of paymentB. Explain how international trade B. Explain how international trade

flows are influenced by economic flows are influenced by economic factors and other factorsfactors and other factors

C. Explain how international capital C. Explain how international capital flows are influenced by country flows are influenced by country characteristicscharacteristics

44

A. Balance of PaymentsA. Balance of Payments

1. Current Account:1. Current Account:

a. Payments for merchandise a. Payments for merchandise and and servicesservices

b. Factor income paymentsb. Factor income payments

c. Transfer payments c. Transfer payments

55

A. Balance of PaymentsA. Balance of Payments

2. Capital and Financial Accounts2. Capital and Financial Accounts

a. Direct foreign investment a. Direct foreign investment (DFI)(DFI)

b. Portfolio investmentb. Portfolio investment

c. Other c. Other

d. Errors and Omissions and d. Errors and Omissions and ReservesReserves

66

B. International Trade FlowsB. International Trade Flows

1. Distribution of U.S. Exports and 1. Distribution of U.S. Exports and ImportsImports

2. U.S. Balance of Trade (BOT) Trend2. U.S. Balance of Trade (BOT) Trend

3. Should the U.S. be Concerned 3. Should the U.S. be Concerned about a Huge BOT Deficit?about a Huge BOT Deficit?

77

Insert Exhibit 2.4 from page 28Insert Exhibit 2.4 from page 28

2006 Distribution of U.S. Exports and Imports

88

C. International Trade IssuesC. International Trade Issues

1. Events that Increased International 1. Events that Increased International TradeTrade

a. Removal of the Berlin Walla. Removal of the Berlin Wall

b. Single European Actb. Single European Act

c. NAFTAc. NAFTA

d. Inception of the Eurod. Inception of the Euro

e. European Union Expansione. European Union Expansion

99

C. International Trade IssuesC. International Trade Issues

2. Trade Friction: Causes2. Trade Friction: Causes

a. Using the exchange rate as a. Using the exchange rate as policypolicy

b. Outsourcingb. Outsourcing

c. Using trade and foreign c. Using trade and foreign ownership policies for securityownership policies for security

d. Using trade policies for d. Using trade policies for political political reasonsreasons

1010

D. Factors Affecting International D. Factors Affecting International Trade FlowsTrade Flows

1. Three Factors Affecting 1. Three Factors Affecting International Portfolio InvestmentInternational Portfolio Investment

a.a. Tax Rates on Interest or DividendsTax Rates on Interest or Dividends

b.b. Interest RatesInterest Rates

c.c. Exchange RatesExchange Rates

1111

E. Correcting a Balance of Trade E. Correcting a Balance of Trade DeficitDeficit

1. Why a Weak Home Currency is Not 1. Why a Weak Home Currency is Not a Perfect Solutiona Perfect Solution

a. Counterpricing by Competitorsa. Counterpricing by Competitors

b. Impact of Other Weak b. Impact of Other Weak CurrenciesCurrencies

c. Prearranged International c. Prearranged International Transactions: J-curve EffectTransactions: J-curve Effect

d. Intercompany Traded. Intercompany Trade

1212

Insert exhibit 2.6 page 38Insert exhibit 2.6 page 38

J-Curve Effect

1313

F. International Capital FlowsF. International Capital Flows

1. Distribution of DFI by U.S. Firms1. Distribution of DFI by U.S. Firms

2. Distribution of DFI in the United States2. Distribution of DFI in the United States

3. Factors Affecting DFI3. Factors Affecting DFI

a. Changes in Restrictionsa. Changes in Restrictions

b. Privatizationb. Privatization

c. Potential Economic Growthc. Potential Economic Growth

d. Tax Ratesd. Tax Rates

e. Exchange Ratese. Exchange Rates

1414

Insert exhibit 2.7 page 39Insert exhibit 2.7 page 39

International Capital Flows (quarterly numbers, annualized; in billions of $)

1515

F. International Capital FlowsF. International Capital Flows4. Impact of International Capital 4. Impact of International Capital

FlowsFlows

Impact of the international Flow of Funds on U.S. Interest Rates and Business Investment in the United States

1616

G. Agencies that Facilitate G. Agencies that Facilitate International FlowsInternational Flows

1. International Monetary Funds1. International Monetary Funds

2. World Bank2. World Bank

3. World Trade Organization3. World Trade Organization

1717

G. Agencies that Facilitate G. Agencies that Facilitate International FlowsInternational Flows

4. 4. International Financial CorporationInternational Financial Corporation

5. 5. International Development AssociationInternational Development Association

6. 6. Bank for International SettlementsBank for International Settlements

7. 7. Organization for Economic Cooperation Organization for Economic Cooperation and Developmentand Development

8. 8. Regional Development AgenciesRegional Development Agencies