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Reading 4: Economic and financial flows in a globalised world - Coggle…
Reading 4: Economic and financial flows in a globalised world
THE BALANCE OF PAYMENTS
is an economic indicator that tracks all transactions between individuals, firms or government bodies of a given country and the rest of the world during a certain period of time
the current account
registers payments for imports and exports for trade in goods/services, plus incomes and transfers of money to and from abroad made by individuals
the capital account
records all transfers of capital to and from abroad
the financial account
records al financial inflows and also covers claims on or liabilities to non-residents, specifically with regard to financial assets
includes direct investments, portfolio investments and reserve assets
the whole account must balance, just as it would for the financial statement
the balance of payments cam help us to understand the comparative positions of a country in relation to others
global imbalances are reflected in large and persistent deficits or surpluses in the current, capital and/or financial account balances
the adjustment of global imbalances can be left to market forces and/or corrected by government actions
countries that have a current account surplus overall export more than they import
surplus countries include China and other Asian emerging markets, the oil producing countries including the OPEC, Russia, Norway as well as Switzerland and Japan
they have incomes and money transfers from aboard that exceed the amount of money transferred to foreign markets
having more surplus countries may make deficit countries borrow/sell assets which would lead them to reduce their spending
surplus countries may fail to spend their collective incomes on consumption or investment goods which will lead to reduced aggregate demand
may decrease circulation of money with negative effects on the economic growth
FOREIGN DIRECT INVESTMENTS
FDIs are a form of investment made by companies
establish plants and offices in other countries in order to produce or sell their products and services in countries around the world
multinationals
companies that have operations in at least two different countries
FDIs are aimed at securing operational control
they should be distinguished from portfolio investments (PIs) whereby financial assets are bought and sold
FDIs represent an important element of the global trade environment and they are particularly critical for some conutries