Lecture Notes for International Finance (FIN 435) by T4nRGwP

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									                              CH 3. BALANCE OF PAYMENTS



1. BALANCE OF PAYMENTS ACCOUNTING: A record of a country’s international transactions
over a certain period of time in double-entry book keeping. Every credit in the account is balanced
by a matching debit and the grand totals should be in balance all the time. The question is where to
draw the line. See Exh 3.1 p. 62

        - The Current Account: includes the export and import of goods and services. This is
comprised of trade balance of goods (merchandise), services, factor income (one foreign
investments), and unilateral transfers (foreign aid, reparations). US has experienced persistent
trade deficits since early 1980s.

Aside) J-curve effect: the effect of currency depreciation on a country’s trade balance. P.64. Our
spending on gas as the oil price increases as an example.

        - The Capital Account: all purchases and sales of assets. FDI (foreign direct investment),
Portfolio investment, and Other investment (short-term trading like currency trading, bank
deposits, trade credit, etc).

       - The Official Reserve Account: move of international reserves like dollars, foreign
currencies, gold, and SDRs

                       BCA + BKA + BRA = 0 (3.1) p.69

*Balance of Payments Trends in Major Countries

        1) US continuous trade deficit and surplus on the capital account. Exh 3.6 on p.73

        2) Japan and China have continuous current account surplus

2. INTERNATIONAL CAPITAL FLOWS (Ch15 and Ch16)

* DFI

     - FACTORS AFFECTING DFI: MARKET SIZE AND GROWTH, TRADE BARRIERS,
STEADY SUPPLY OF RAW MATERIALS, COST ADVANTAGES, GOVERNMENT
REGULATIONS, TAXES, EXCHANGE RATES, ETC

* PORTFOLIO INVESTMENT

        - RETRUNS (CAPITAL GAINS AND INCOME), EXCHANGE RATES

								
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