1 / 32

INTERNATIONAL FINANCIAL MANAGEMENT

The Balance of Payments and Foreign Exchange. INTERNATIONAL FINANCIAL MANAGEMENT. Third Edition. EUN / RESNICK. Balance of Payments Accounting.

colleen-bernard
Download Presentation

INTERNATIONAL FINANCIAL MANAGEMENT

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. The Balance of Payments and Foreign Exchange INTERNATIONAL FINANCIAL MANAGEMENT Third Edition EUN / RESNICK

  2. Balance of Payments Accounting • The Balance of Payments is the record of a country’s international transactions over a certain period of time presented in the form of double-entry bookkeeping.

  3. Balance of Payments Accounts • The Balance of Payments record all transactions between the residents of a country and residents of all foreign nations. • These two accounts are: • The Current Account • The Capital Account

  4. How the two accounts are calculated 1) The Current Account is net exports (NX) = exports – imports 2) The Capital Account is Net Capital Outflow (NCO) = Capital Outflow – Capital Inflow Asset investment going out of country – Asset investment coming into country

  5. Current Account Total value of : Exports – Imports • Capital Account Total value of: Investment going out of the country – Investment coming into the country

  6. The Current Account • Includes all imports and exports of goods and services. • Also Includes transfers of foreign aid. .

  7. The Capital Account • The capital account measures the difference between U.S. purchases of foreign assets and the U.S. sales of assets to foreigners. • The capital account is composed of • Foreign Direct Investment (FDI) • Portfolio investments • Other investments

  8. Each of the two Balance of Payment accounts are divided into: Credit Side Debit Side

  9. Balance of Trade • If the credits exceed the debits, then a country is running a trade surplus • If the debits exceed the credits, then a country is running a trade deficit.

  10. Balance of Payments Example • Suppose that a Julington Creek Bicycle shop imports $100,000 worth of bicycle frames from a dealer in England. • There will exist a $100,000 credit recorded by the English dealer in his bank account and a $100,000 debit in the bank account of the Bicycle Shop in Julington Creek.

  11. Credits Debits Current Account 1 Exports $625,000 2 Imports ( $210,000) 3 Balance on Current Account Capital Account 4 Direct Investment $350,000 ($280,000) 5 Portfolio Investment $125,000 ($400,000) 6 Other Investments $40,000 ($250,000) Balance on Capital Account -$415,000 U.S. Balance of Payments Data Here there is a current account credit and a capital account deficit $ 415,000

  12. Let’s change our credits and debits around

  13. Credits Debits Current Account 1 Exports $210,000 2 Imports ( $625,000) 3 Balance on Current Account -$415,000 Capital Account 4 Direct Investment $280,000 ($350,000) 5 Portfolio Investment $400,000 ($125,000) 6 Other Investments $250,000 ($40,000) Balance on Capital Account $415,000 U.S. Balance of Payments Data If the U.S. imported more than it exported, there would be current account deficit. Which would be balanced out by a capital account credit.

  14. Credits Debits Current Account 1 Exports $210,000 2 Imports ($625,000) 3 Balance on Current Account -$415,000 Capital Account 4 Direct Investment $280,000 (350,000) 5 Portfolio Investment $400,000 ($125,000) 6 Other Investments $250,000 ($40,000) Balance on Capital Account $415,000 Balance of Payments and the Exchange Rate Exchange rate $ P S D Q As U.S. citizens import and purchase foreign assets, they supply dollars to the FOREX market.

  15. Currency Converter • http://www.xe.com/ucc/

  16. Credits Debits Current Account 1 Exports $210,000 2 Imports ($625,000) 3 Balance on Current Account ($415,000) Capital Account 4 Direct Investment $280,000 ($350,000) 5 Portfolio Investment $400,000 ($125,000) 6 Other Investments $250,00 ($40,000) Balance on Capital Account $415,000 Balance of Payments and the Exchange Rate Exchange rate $ P S D Q As U.S. citizens export and sell assets to other countries, foreigners demand dollars in the FOREX market.

  17. In this graph we have the English pound as the currency in the quantity(notice the difference from the previous graphs)

  18. The Flow of Currencies: Whisky sold to Italian hotel Export earnings for UK (Credit on Balance of Payments) € changed to £ Map courtesy of http://www.theodora.com

  19. The Flow of Currencies: Oil from Russia Oil £ changed into Roubles Export earnings for Russia Import expenditure for the UK (Debit on balance of payments) Map courtesy of http://www.theodora.com

  20. Players in the Foreign Exchange Market • companies that export and import • investors and banks • speculators who wish to engage in market activity • central banks that affect the value of Foreign Currency • Let’s look at this for example on a graph

  21. Central Bank affect on Supply Federal Reserve can affect the Forex Market

  22. Shifts in Forex Market Change in prices (inflation or deflation) Change in consumer income Change in interest rates paid on asset investment Expectations about a currencies value

  23. Corresponding Shifts E/$ An increase or decrease in Demand for one country’s currency causes a corresponding increase or decrease in Supply of the other currency of dollars

  24. For example, an increase in exports from England would shift the demand curve for British pounds to the right and push up the exchange rate. Originally, one pound was equal to $1.60, but now one pound equals $1.70. Its value has risen or appreciated. (and the dollar has depreciated) $1.70

  25. A higher currency makes a country's exports more expensive and imports cheaper in foreign markets; a lower currency makes a country's exports cheaper and its imports more expensive in foreign markets. A higher exchange rate can be expected to lower the country's balance of trade, while a lower exchange rate would increase it.

  26. Strong Dollar Weak Dollar Products in foreign countries are cheaper so imports rise Tourist to foreign countries find their money is MORE valuable Products in foreign countries are more expensive so exports rise Tourist to foreign countries find their money is LESS valuable

  27. Exchange Rates • Floating Exchange Rates: • Price determined only by demand and supply of the currency – no government intervention • http://www.youtube.com/watch?v=5c9y1-bhz34&feature=related • Fixed Exchange Rates: • The value of a currency fixed in relation to an anchor currency – not allowed to fluctuate • www.youtube.com/watch?v=Zku0VnKsyG4&feature=related • Managed Exchange Rate: • rate influenced by government via central bank around a preferred rate

  28. Balance of Payments Trends • Since 1982 the U.S. has experienced continuous deficits on the current account and continuous surpluses on the capital account.

  29. Balances on the Current (BCA) and Capital (BKA) Accounts of the United States Source: IMF International Financial Statistics Yearbook, 2000

  30. Balances on the Current (BCA) and Capital (BKA) Accounts of China Source: IMF International Financial Statistics Yearbook, 2000

  31. Foreign Exchange Market Practice • http://www.youtube.com/watch?v=6s8DmOO_jwc&feature=related • http://www.youtube.com/watch?v=d-gIT-ecZ6A&feature=related

More Related