International Finance Introduction. Today’s Objectives. Understand the syllabus and how it works Understand my goals for this course (teaching and learning objectives) Understand my philosophy of teaching Understand the focus of the course
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International Finance Introduction
International economic integration refers to the extent and strength of real- sector and financial-sector linkages among national economies. Real-sector linkages occur through the international transactions in goods and services while the financial-sector linkages occur through international transactions in financial assets.
Differences relevant to international financial management
Exchange risks, taxes, multiple money markets (often w/limited access to credit, some w/currency controls), political risks
Access to segmented money markets, shift profits to lower taxes, reduce risk thru international diversification of markets & production sites
Constantsrelevant to international financial management
Systematic (undiversifiable) risk
Unsystematic (diversifiable) risk
You cannot create value with smoke and mirrors
The International Financial Architecture
Balance-of-Payments Accounts and Net Financial Flows
[ignoring reporting errors and official settlements]
Sources of Foreign Exchange
Exports of Goods and Services $43,142
Balance on goods, services, remittances, and pensions +$4065
Foreign Capital Flow, net $2,532
Balance of all of the above -$1357
Change in U.S. Reserve Assets $568
Change in Liquid Liabilities of Foreign Accounts $789
Uses of Foreign Exchange
Imports of Goods and Services $38,063
Remittances and Pensions $1,015
U.S. Government grants, net $3,444
U.S. private Capital Flow, net $4,298
Errors and Omissions $210
Source: Federal Reserve Bulletin, April 1969, pp A70-71
The Balance of Payments Accounting System
A quarterly statistical summary of transactions between U.S. and foreign residents organized into three major categories:
International Allocation of Capital
y = c + i + g.
y - c - g = i.
y - c - g = i.
s = i.
National Income (GNY) = Consumption (C) + Savings (S)
National Spending (GNE) = Consumption (C) + Investment (I)
GNY - GNE = S - I
GNY - GNE = Exports (x) - Imports (m)
S - I = x - m
Net Foreign Investment = x - m
GNE = Household spending + Private I + Government spending
= GNY - Private S - Taxes + Private I + Government spending
GNE - GNY = Private (I - S) + GovDeficit/Surplus
NFF = Private savings surplus - GovDeficit
US Balance of Payments
A current account deficit must be financed by capital inflows, or it cannot be incurred in the first place
Over 1982-2003, U.S. current account deficits have averaged $183 billion per year.
$4 trillion worth of assets have been transferred to foreign ownership.
U.S. monthly GDP: $1 trillion
U.S. GDP per worker: $84,000 per year
Much of this capital inflow has been portfolio investment.
Some has been direct investment.
Direct Investment Positions
At current market value, $ trillion
U.S. Direct Investment Abroad
Foreign Direct Investment in U.S.