Balance of Payment Notes
Balance of Payment Notes FMIB3
Hult International Business School
Popular in Global Economics
Popular in International Business
This 2 page Class Notes was uploaded by Mischa Rapt on Tuesday September 22, 2015. The Class Notes belongs to FMIB3 at Hult International Business School taught by David Green in Summer 2015. Since its upload, it has received 14 views. For similar materials see Global Economics in International Business at Hult International Business School.
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Date Created: 09/22/15
Balance of Payments Transfer of funds between countries In owcredit Out owdebit H 1 Current Account measures mainly in trade of goods and services often used as a measure of health of economytrade surpluses does not always mean a healthy economy sometimes costs are ignored 2 Capital Account capita transfers and sales of assets intellectual property sales and purchases of intangible assets purchases or sales of nancial assets in or out a reserve 3 Of cial settlements account change in foreign exchange reserves or transfers between govts x country assets owned by y country govt Foreign exchange earned increase in current account surplus increase in reserves Can be invested in another country capital ow Balance of payment accounts should always balance statistica discrepancies in exchange rate changes de cits in some countries mean surpluses for another BOP explains relationship between domestic economic trends and cross border ows of goodsservices and asset transfers surpuses on one side of BOP means de cits in another surpuses in one country requires de cits in some others out ows in capital accounts can destabilize trade BOP re ects changes in GDP in developing countries higher investment may require higher imports resulting in trade de cits de cits on current accountssurpluses on capital acct 0 Foreign Exchange salepurchase of one national currency for another international trade only occurs with foreign exchange somewhere Foreign Exchange Rates Appreciation One currency gets stronger buys more of another currency Depreciation one currency gets weaker buys less of another currency 0 Currency markets 1 spot marketmarket for foreign exchange in current period 2 futures markethelps people speculate on exchange rate movements 0 Currency exchange market like any other market Spreaddifference of buying at one price selling at another arger transactions incur less spread the more international trade the smaller the spread Exchange between any two currencies can be found by forming ratio of third currency 0 Foreign exchange rate shifts affect BOP appreciating currency means imports are cheaper and exports are priciercausing it to drop depreciating currency means more exportsfewer imports gains depends on terms of trade relative prices of goods in different countries 0 Real Exchange Rate 0 Financial ows also affected by changes in foreign exchange rates if currency appreciates past loans are easier to pay if depreciates past loans may become impossible to repay Currency Speculationcan make money speculating on expected shift guess wrong and you lose big Asian nancial crisis if you think currency will depreciate borrow money and it will be cheaper to repay in your own currency if you think it will appreciate invest and buy currency to get pro ts and returns 0 Exchange rate determinants Economic models not good at predicting exchange rates reative supply and demand re ecting trade and nancial owssharp changes in trade like discovery in oil will increase supply of foreign currency appreciating home currency high interest rates attract foreign investors appreciating home currency Governments can set exchange ratesinterferes with other policies to control supply and demand can set it by 1 Fixed exchange rate 2 Range for your currency against reference currency 3 Managing change in any direction leaning against the wind Leaning against the wind sharp changes in exchange rate can slow down in ux of currency Foreign exchange rates can be set as long as the economy can validate that rate price set by foreign exchange only makes sense of economic condition you can distort economy for exchange rate to work or allow the exchange rate to settle it trade imbalance can be a cause of exchange rates not equilibrating