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CHAPTER 2: INTERNATIONAL FLOW OF FUNDS - Coggle Diagram
CHAPTER 2: INTERNATIONAL FLOW OF FUNDS
Balance of Payment
Components of the Balance of Payments Statement
Capital Account
Originally included the financial account.
Includes the value of financial assets transferred across country borders by people who move to a different country.
Includes patents and trademarks.
Relatively minor(in terms of dollar amounts) to financial
account.
Financial Account
Direct foreign investment
Portfolio investment
Other capital investment
Errors and omissions and reserves
Current Account
Payments for Goods and Services
Primary Income Payments
Secondary Income
Growth in International Trade
Events That Increased Trade
Volume
Remove the Berlin Wall
The European Single Act of 1987
North American Free Trade Agreement (NAFTA)
General Agreement on Tariffs and Trade (GATT)
European Union
The Beginning of the Euro
Other Trade Agreements
Impact of Outsourcing on Trade
Impact of outsourcing
Definition of Outsourcing
Managerial decisions about outsourcing
Criticism of outsourcing
Mass Commerce
United States and other countries Country
About 20% of all U.S. exports go to Canada, while 13% go to Mexico.
Canada, China, Mexico and Japan are major exporters to the United States. they are responsible for many
more than half the value of all U.S. imports
between countries
The United States accounts for 10 to 20 percent of GDP
Factors Affecting International Trade Flows
Impact of Inflation
Current account decreases if inflation increases relative to trade partners.
Cost of labor
Impact of National Income
Current account decreases if national income increases relative to other countries.
Impact of Credit Conditions
Tend to tighten when economic conditions weaken, causing banks to be less willing to extend financing to MNCS
Impact of Government Policies
About import and export
business legal system
Impact of Exchange Rates
Current account decreases if currency appreciates relative to other currencies.
May correct a balance of trade deficit
When a home currency is exchanged for a foreign currency to buy foreign goods --> increased foreign demand --> home currency faces downward
May not correct a balance of trade deficit
Exchange rates will not automatically correct any international trade balances
Limitations of a Weak Home Currency
Competition
Impact of other currencies
international trade transactions
Intracompany trade
Government attempts to influence exchange rates can lead to international disputes
Agencies that Facilitate International Flows
International Monetary Fund
Major Objectives of the IMF
provide temporary funds to member countries that are correcting imbalances in international payments
promote free trade.
World Bank - (International Bank for Reconstruction and
Evolution)
Main objective - Lending to countries for economic development.
Structural Adjustment Loans (SALs) are intended to enhance a country's long-term economic growth.
Funds are distributed through co-financing agreements:
Official aid agencies
Export credit agencies
The commercial banks
Regional Development Agency
Inter-American Development Bank
Asian Development Bank
African Development Bank
European Bank for Reconstruction and Development:
World Trade Organization (WTO)
International Finance Corporation (IFC)
International Developm0)ent0Association (IDA)
Bank for International Settlements (BIS)
OECD - Organization for Economic Cooperation and Development
Primary Objective (WTO) - To provide a forum for multilateral trade to negotiate and resolve inter-related commercial disputes
relevant GATT.
Main objective (IFC) - promote private enterprise in the Country
Major Objectives (IDA)- extens Loans at low intererst rates to poor nations that connot qualify for Loans from the world Bank
Main objectives (BIS) - to facilitate cooperation between countries
for international transactions. Sometimes called a "central banker of a central bank" or a "lender of last resort."
Primary Objective (OCED) - To facilitate governance in the governments and corporations of market economies.
International Capital Flows
Factors Affecting International Portfolio Investment
Tax Rates on Interest or Dividends
Interest Rates
Exchange Rates
Interest Rates:
Money tends to flow to countries with high interest rates, as long as the local currencies are not expected to weaken
Exchange Rates:
Investors are attracted to a currency that is expected to strengthen
Tax Rates on Interest or Dividends:
Investors normally prefer to invest in a country where taxes are relatively low.
Impact of International Capital Flows
Foreign investors are especially attracted to the U.S. financial markets when the interest rate in their home country is substantially lower than that in the United States.
U.S. reliance on foreign funds: In general, access to
international funding has allowed more growth in the U.S. economy over time but has also made the U.S. more reliant on foreign investors
The United States relies heavily on foreign investment in:
U.S. manufacturing plants, offices, and other buildings.
Debt securities issued by U.S. firms.
U.S. Treasury debt securities.
Factors Affecting Direct Foreign Investment
Changes in Restrictions
Privatization
Potential Economic Growth
Tax Rates
Exchange Rates
Potential Economic Growth:
Countries with greater potential for economic growth are more likely to attract DFI
Tax Rates:
Countries that impose relatively low tax rates on corporate earnings are more likely to attract DFI.
Privatization:
DFI is stimulated by new business opportunities associated
with privatization.
Managers of privately owned businesses are motivated to
ensure profitability, further stimulating DFI
Exchange Rates:
Firms typically prefer to pursue DFI in countries where the
local currency is expected to strengthen against their own.
Changes in Restrictions:
New opportunities have arisen from the removal of
government barriers.