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Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,*,*,*,Multinational Financial Management,Alan Shapiro7,th,Edition,J.Wiley&Sons,Power Points by,Joseph F.Greco,Ph.D.,California State University,Fullerton,1,CHAPTER 5,THE BALANCE OF PAYMENTS AND INTERNATIONAL LINKAGES,2,CHAPTER OVERVIEW,I.BALANCE-OF-PAYMENT CATEGORIES,II.THE INTERNATIONAL FLOW OF GOODS,SERVICES,AND CAPITAL,III.COPING WITH CURRENT ACCOUNT DEFICITS,3,PART I.,BALANCE-OF-PAYMENTCATEGORIES,A.THE BALANCE OF PAYMENTS(B-O-P),1.PURPOSE:,Measures all financial and economic transactions over,a specified period of time.,4,BALANCE-OF-PAYMENTCATEGORIES,2.Double-entry bookkeeping,a.Currency inflows=credits,earn foreign exchange,b.Currency outflows=debits,expend foreign exchange,5,BALANCE-OF-PAYMENTCATEGORIES,3.Three Major Accounts:,a.Current,b.Capital,c.Official Reserves,4.Current Account,records net flow of goods,services,and unilateral transfers.,6,BALANCE-OF-PAYMENTCATEGORIES,5.Capital Account,a.Function:records public and private investment and lending.,b.Inflows=credits,c.Outflows=debits,7,BALANCE-OF-PAYMENTCATEGORIES,5.Capital Account(cont),d.Transactions classified as,1.)portfolio,2.)direct,3.)short term,8,BALANCE-OF-PAYMENTCATEGORIES,6.Official Reserves Account,a.Function:,1.)measures changes in,international reserves,owned by central banks.,2.)reflects surplus/deficit of,a.)current account,b.)capital account,9,BALANCE-OF-PAYMENTCATEGORIES,6.Official Reserves Account(cont)b.Reserves consist of,1.)gold,2.)convertible securities,10,BALANCE-OF-PAYMENTCATEGORIES,7.NetEffects:,a.Sumofalltransactionsmust be zero:,1.)currentaccount,2.)capitalaccount,3.)official reserves,11,BALANCE-OF-PAYMENTCATEGORIES,8.The Balance-of-paymentmeasures,a.SomeDefinitions:,1.)Basic Balance,a.)consists of current,accountandlong-term capital flows.,12,BALANCE-OF-PAYMENTCATEGORIES,1.)Basic Balance(cont),b.)emphasizeslong-termtrends.,13,BALANCE-OF-PAYMENTCATEGORIES,1.)Basic Balance(cont),c.)excludesshort-termcapitalflowsthat heavily dependontemporaryfactors.,14,BALANCE-OF-PAYMENTCATEGORIES,2.)NetLiquidity Balance:,measuresthechangein,privatedomesticborrowing,or lending require to keep,paymentsequal without,adjustingofficial reserves.,15,BALANCE-OF-PAYMENTCATEGORIES,3.)Official ReserveTransactions,Balance,-measures adjustments,needed byofficialreserves.,16,PARTII.THE INTERNATIONAL FLOW OFGOODS,SERVICES,ANDCAPITAL,II.LINKSFROMINTERNATIONALTO DOMESTIC FLOWS,A.GlobalLinkages,set of basic macroeconomic identitieswhich link:,domestic spending andproduction tocurrent andcapital accounts,17,THE INTERNATIONAL FLOW OFGOODS,SERVICES,AND CAPITAL,B.Domestic SavingsandInvestment,and the CapitalAccount,1.National Income Accounting,a.National Income(NI)iseither spent(C)orsaved(S),NI=C +S(5.1),18,THE INTERNATIONAL FLOW OFGOODS,SERVICES,AND CAPITAL,b.National spending(NS)is,divided into personalspending(C)andinvestment(I),NS =C+I(5.2),19,THE INTERNATIONAL FLOW OFGOODS,SERVICES,AND CAPITAL,c.Subtracting(4.2)-(4.1),NI-NS =S-I(5.3),If NI NS,S I which implies,thatsurplus capitalspentoverseas.,20,THE INTERNATIONAL FLOW OFGOODS,SERVICES,AND CAPITAL,d.Ina freely-floating system,excess saving=thecapitalaccount balance,e.Implications:,1.Anation which producesmorethan itspends willsavemorethanit investsdomestically with anetcapital outflowproducingacapitalaccount deficit.,21,THE INTERNATIONAL FLOW OFGOODS,SERVICES,AND CAPITAL,2.Anation which spendsmorethan it produceshasa netcapital inflowproducingacapital accountsurplus.,3.Ahealthy economy will tend to,run acurrent account deficit.,22,THE INTERNATIONAL FLOW OFGOODS,SERVICES,AND CAPITAL,C.THE LINK BETWEENTHECURRENTAND CAPITALACCOUNTS,1.Beginning identity,NI-NS=X-M(5.4),whereX=exports,M=imports,X-M=current accountbalance(CA),23,THE INTERNATIONAL FLOW OFGOODS,SERVICES,AND CAPITAL,2.Combining(5.3)+(5.4),S -I =X-M(5.5),3.If S-I=Net ForeignInvestment(NFI),NFI=X-M(5.6),24,THE INTERNATIONAL FLOW OFGOODS,SERVICES,AND CAPITAL,4.Implications:,a.IfCA is insurplus,thenationmustbe anetexporter ofcapital.,b.IfCA is a deficit,the nationisa major capital importer.,c.When NS NI,theexcessmust beacquired throughforeign trade.,25,THE INTERNATIONAL FLOW OFGOODS,SERVICES,AND CAPITAL,d.Solutions for Improving CAdeficits:,1.)Raisenational income(output),relative to domesticinvestment(I).,2.)Increase(S)relativetodomestic investment(I).,26,THE INTERNATIONAL FLOW OFGOODS,SERVICES,AND CAPITAL,D.GOVERNMENT BUDGETS AND,CURRENT ACCOUNTDEFICITS,1.,CURRENT ACCOUNTBALANCE,CA=Saving Surplus-Gov,tbudget deficit,27,THE INTERNATIONAL FLOW OFGOODS,SERVICES,AND CAPITAL,2.CA Deficitmeans,the nationis not savingenoughto finance(I)andthedeficit.,3.CA Surplusmeans,the nationis savingmorethanneeded tofinance its(I)and deficit.,28,PARTIII.COPING WITH THECURRENT ACCOUNT DEFICIT,I.POSSIBLE SOLUTIONS,UNLIKELY,TOWORK:,A.Currency Depreciation,B.Protectionism,29,COPING WITH THECURRENTACCOUNT DEFICIT,II.CURRENCY DEPRECIATION,A.U.S.Experience:,Do
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