International finance
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INTERNATIONAL FINANCE. International Business College Fang De-dong Ph.D Associate Professor Tel: 13688675513 E-mail: [email protected] 00- 1. Chapter One International Economics Is Different. [teaching targets and demands]

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International finance

INTERNATIONAL FINANCE

International Business College

Fang De-dong

Ph.D Associate Professor

Tel: 13688675513

E-mail: [email protected]

00-1


Chapter one international economics is different

Chapter OneInternational Economics Is Different

  • [teaching targets and demands]

  • To introduce the relative concepts of international finance, for instance, currency exchanges between different countries for trades and investments, by four typical events.


International finance

  • [Teaching key and difficult points]

  • How to make students understand that different economics in different countries leads to creation of international finance.


International finance

  • [chapter outline ]

  • Four Events

  • the Euro, Argentina( from darling to delinquent);

  • Economics and the nation-state: different moneys, different fiscal policies, factor ability.


Chapter 2

CHAPTER 2

Payments

Among Nations


International finance

  • [teaching targets and demands]

  • Be sure to master the concepts such as balance of payments, current accountbalance, direct investments, portfolio investment, official settlement balance etc. and the methods to make and analyze a balance of payments presentation.


International finance

  • [Teaching key and difficult points]

  • How to make and analyze a balance of payments presentation.


Chapter outline

chapter outline

  • Two sides to any international exchange;

  • Putting the account together;

  • The macroeconomic meaning of the current account balance;

  • The macro meaning of the overall balance;

  • The International investment position


Balance of payment bop

Balance of Payment (BOP)

  • What is a countrys balance of payment?

    • A systematic account of all the exchanges of value between residents of that country and the rest of the world during a given time period

    • Tow flows in any transaction

    • The Records Principle of BOP Statements: double-entry bookkeeping


International finance

Double Entry Bookkeeping

the system of keeping accounts every payment appears twice in different accents once as a credit and once as a debit .

bookkeeping recording business transactions

account


International finance

  • CreditA credit item (+) is a flow for which the country is paid.

  • DebitA debit item (-) is a flow for which the country must pay.


International finance

Paul .A .Samuelson16p300


International finance

(flow of fund)

20101

+ -

3500

-350

-2000

1000 -100

4500 -2450 2050end


International finance

  • Credit

  • Exports of goods

  • Purchases by foreigners in this country

  • Foreigners investing in the countrys bonds


International finance

  • Debit

  • Imports of goods

  • Purchases by firms in this country from foreign countries

  • Purchases by investors in this country from foreigners


International finance

  • 1+

  • 2-


International finance


International finance

  • Six categories of flows

    • Merchandise trade flows

    • Goods and Services flows

    • Income flows

    • Unilateral transfers

    • Private capital flows

    • Official international reserve flows

18


International finance

  • Six balances

    • Merchandise (goods) trade balance

    • Goods and service balance (trade balance)

    • Goods, service, and income balance

    • Current balance (net foreign investment)

    • Financial account balance

    • Overall balance (official settlement balance)

19


Outline of balance of payment

Outline of balance of payment

  • Current account(CA)

  • Financial account(FA)

  • Official international reserve

  • Statistical discrepancy (net value of errors and omissions)


Current account ca

Current account(CA)

  • Merchandise (goods) trade balance

  • Goods and service balance (trade balance)

  • Goods, service, and income balance

  • Goods, service, income and unilateral balance


International finance

1goodsfree of boardFOB

2services

3income

4current transfer

00-22


Financial account fa

Financial account(FA)

  • is a record of international exchange of assets and liabilities . Including direct investments and securityportfoliol investments .


International finance

  • direct investments: any flow of lending to, or purchases of ownership in a foreign enterprise that is largely owned by residents of the investing country. (IMF25%, US.10%)

  • portfoliol investments: lending or purchases include international flows of securities, loans and bank deposits. The investor does not own a large share of the enterprise being invested in,but just investing as part of portfolio.


Official international reserve

Official international reserve

  • Money-like assets that are held by government and that are generally recognized by government as fully acceptable for payments between them.


International finance

  • Foreigh exchange(Bonds, stocks and deposits)

  • Gold

  • SDRs(Special Drawing Rights)

  • Deposit in IMF


Statistical discrepancy errors and omissions

Statistical discrepancyerrors and omissions

  • If the two sides of every transaction are correctly recorded, there would not be any stastitical discrepancy. The sum are not equal, means thant any items were missed or to say anything were undermeasured. Eg. Private capital flows. Underreport merchadise imports, income receipts and capital exports. (smuggling, Drug trafficking)


International finance

00-28


How to make bop

How to make BOP

  • CreditA credit item (+) is a flow for which the country is paid.

  • Exports of goods

  • Purchases by foreigners in this country

  • Foreigners investing in the countrys bonds


International finance

  • DebitA debit item (-) is a flow for which the country must pay.

  • Imports of goods

  • Purchases by firms in this country from foreign countries

  • Purchases by investors in this country from foreigners


International finance

  • 1+

  • 2-


International finance


The macro meaning of current account balance

The macro meaning of current account balance

1.Financing and international financial flows: Net foreign investment (If).-

CA = If

National saving (S) versus domestic investment (Id).

S = Id + If, so that CA = S Id


International finance

gross domestic products GDP

gross national products GNP

GNP

00-35


International finance

CIG

CSPT

C+I+G=Y=C+ SP+TI= SP +T-G

T-G=Sg

S

I=S

00-36


International finance

XMY=C+I+G+X-M

CA=X-M

CIGdomestic absorptionEE=C+Id+G

CA=Y-ACA>0CA<0CA

CA=S-IS<IS>I

00-37


International finance

3.Domestic production (Y) versus national expenditure (E). Y = C + Id + G +(X M), E = C + Id + G, and CA = (X M) approximately, so that

CA = Y E


The overall balance

The Overall Balance

B: the official settlements balance measures the sum of the current account balance plus the private capital account balanceKA.

B = CA+KA

Any imbalance in the official settlements balance must be financed through official reserves flows: OR

B+OR =0


International finance

  • The international investment position

  • A statement of the stocks of a nations international assets and foreign liabilities at a point in time

  • Flow vs. stock (lender or borrower vs. creditor or debtor)


Analysis of bop statements

Analysis of BOP Statements

The meanings of imbalance

means the expenditure total amount

exceed receipts or contrary circumstance

in a countrys balance of payments . The

former is BOPdeficitThe latter is BOP

surplus.

surplus favorable

deficit unfavorable


International finance

1.

2.

1. above the line

2.

below the line


International finance

Net Errors and Omissions


International finance

Trade Balance

Current Account Balance


International finance

Overall Balance

IMF


International finance

+ = 0

+ =


Conceptions summary

Conceptions (summary)

1. balance of payments: a set of account recording all flows of value between residents of a country and the rest of the world during a given period of time.

2. capital inflow :an increase in a nation's assets obtained from other countries or a decrease in its liabilities to other countries.

3. capital outflow: an increase in a nation's liabilities to foreign residents or a decrease in assets previously obtained from other countries.

00-53


International finance

4. merchandise trade balance:net credits minus net debits on merchandise.

5. goods and services balance:net exports of goods and services.

6. goods, services, and income balance:net income flows and net exports of goods and services.

7. current account balance: net credits minus debits on the flows of goods, services, income, and unilateral transfers.

00-54


International finance

8. capital account balance: net credits minus debits involving changes in private national residents' foreign financial assets and liabilities. (pg.16)

9. official settlements balance: the sum of the current account balance plus the private capital account balance. (an imbalance in the official balance must be paid for through official reverses transaction)

10 official international reservesmoney like assets such as gold that are generally recognized as official assets

00-55


International finance

11 direct investments any flow of lending to, or purchases of ownership in, a foreign enterprise that is largely owned by residents of the investing country. (IMF25%, U.S.10%)

Portfolio investment: lending or purchases include international flows of securities, loans and bank deposits. The investor does not own a large share of the enterprise being invested in,but just investing as part of a diversified portfolio.

00-56


International finance

12 net foreign investment: the change in a nation's foreign assets minus foreign liabilities.

13 international investment position: the net accumulation of foreign assets minus foreign liabilities.


International finance

  • 14 Capital flight:The secret sending of wealth to foreign countries, away from the supervision of ones home government.


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