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- - - - The key components of the balance of payments.
        
        How the international flow of funds is influenced by economic factors and other factors.
        
        On successful completion of this topic students should be able to:
        
        Explain the key components of the balance of payments.
        
        Explain how the international flow of funds is influenced by economic factors and political factors.
        
        Explain how the international flow of funds is influenced by country characteristics.
        
        On successful completion of this topic students should understand the following:
    - - The balance of payments is a summary of transactions between domestic and foreign residents for a specific country over a specified period of time.
        A resident is an individual or business or any organization operating in the particular country.
      - Yesterday you can buy One burger at US10 in US (equals to RM40) .
        
        Assume, today US value increase
        
        Today you can still buy One burger at US10 in US (equals to RM44). So you as Malaysian spending at US, you feel spending more to buy the same thing.
        
        Thus, Supply of RM increase and this is debit on Malaysia balance of payment
    - - The current account summarizes the flow of funds between one specified country and all other countries due to purchases of goods or services, or the provision of income on financial assets.
        
        Key components of the current account include:
        
        Balance of trade; balance of services; balance of income, and current transfers.
        
        Refer to example 1.
      - Capital or Financial Account
    - - The capital/financial account summarizes the flow of funds resulting from the sale of assets between one specified country and all other countries.
      - The key components of the capital account are direct foreign investment, portfolio investment, and other capital investment.
      - Direct foreign investment
        
        Investment in fixed assets in foreign countries that can be used to conduct business operations.
        
        E.g. a firm’s acquisition of part or all of a foreign company, or the construction of a new manufacturing plant.
      - Portfolio investment
        
        Transactions involving long-term financial assets (stocks, bonds) between countries.
        
        No participation in management
        
        Investment below 10%.
        
        Other capital investment
        
        Transactions involving short-term financial assets (money market securities) between countries.
  - - - Impact of Inflation
        
        A relative increase in a country’s inflation rate will decrease its current account, as imports increase and exports decrease.
        
        Impact of National Income
        
        A relative increase in a country’s income level will decrease its current account, as imports increase.
        
        Impact of Government Restrictions
        
        A government may reduce its country’s imports by imposing a tariff on imported goods, or by enforcing a quota.
        
        Some trade restrictions may be imposed on certain products for health and safety reasons.
        
        May 2013 - Malaysia Health Ministry has suspended the importation from a number of food manufacturing companies in Taiwan, including tapioca starch balls or pearls used in making Bubble Tea because they were reported to contain maleic acid that could cause kidney damage after long term consumption.
        
        Impact of Exchange Rates
        
        If a country’s currency begins to rise in value, its current account balance will decrease as imports increase and exports decrease.
        
        The factors interact, such that their simultaneous influence on the balance of trade is complex.
        
        E.g. devaluing the home currency on its own will indeed make imports more expensive.
        
        But what if there is inflation in the home country?
        
        Imports may be more expensive; but home goods even more expensive.
    - - By reconsidering the factors that affect the balance of trade, some common correction methods can be developed.
        
        Increase foreign demand for the country’s goods and services will improve its balance of trade position.
        
        Foreign demand may increase if export prices become more attractive.
        
        But how to make the export prices become more attractive?
      - To reduce Country’s inflation rate: increase tax and interest rate, money in supply will reduce
        
        To devalue the home currency: sell home currency in foreign exchange for other currency, thus over supply of home currency in market.
        
        Making the prices cheaper from a foreign prospective: produce competitive product at minimal cost, export is attractive, home demand for product increase (import reduce)
    - - best acrtoon
  - - - Factors affecting Foreign Direct Investment (FDI)
        
        Changes in Restrictions
        
        New opportunities may arise from the removal of government barriers.
        
        Privatization
        
        FDI has also been stimulated by the selling of government operations.
        
        Potential Economic Growth
        
        Countries that have higher potential for economic growth are more attractive.
        
        Tax Rates
        
        Countries that impose relatively low tax rates on corporate earnings are more likely to attract FDI.
        
        Exchange Rates
        
        Firms typically prefer to invest in countries where the local currency is expected to strengthen against their own.
  - - - Tax rates on interest or dividends.
        
        Investors normally prefer to invest in a country where the taxes on interest or dividend income from investments are relatively low.
        
        Investors assess their potential after-tax earnings from investments in foreign securities.
      - 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.
        
        When investors invest in a security in a foreign country, their return is affected by the change in the value of the security, and the change in the value of the currency in which the security is denominated.
      - The International Monetary Fund (IMF)
        
        The major objectives of the IMF :
        
        promote cooperation among countries on international monetary issues
        
        promote stability in exchange rates
        
        provide temporary funds to member countries attempting to correct imbalances of international payments
        
        promote free mobility of capital funds across countries
        
        promote free trade.
        
        The IMF help stabilises international payments because trade represents a significant portion of the international payments.
        
        do the tutorial later