International Finance: Chapter 2

Front 1

What is the balance of payments?

Back 1

Summary of transactions between domestic and foreign residents for a specific country over a period of time.

-transactions by businesses, individuals and government.

-current account & capital account.

Front 2

What is the current account?

Back 2

A summary of the flow of funds between one specified country and all other countries due to the purchases of goods or services.

Front 3

What does the current account include?

Back 3

-Payment for merchandise and services

(exports minus imports)

-Factor income payments

(income from investors on foreign investments and securities)

-Transfer payments (aid, grants and gifts from one country to another).

Front 4

What is the capital account?

Back 4

represents a summary of the flow of funds resulting from the sale of assets between one specified country and all other countries over a period time.

Front 5

What does the capital account include?

Back 5

-Direct Foreign Investment

-Portfolio Investment

(transactions involving stocks and bonds)

-Other Capital Investment

(transactions involving money market securities)

Front 6

What is the balance of payment equation?

Back 6

Current Account + Financial Account + Capital Account=0.

Any current account deficit must be matched by an equal surplus in the other accounts.

Front 7

What is the relationship of inflows and outflows of funds for a country's balance of trade?

Back 7

Inflows of funds: positive numbers (credits)

Outflows of funds: negative numbers (debits)

Front 8

What is the national income identity in an open economy?

Back 8

ca = Y - ( C + I + G )

net exports= output- domestic spending

ca= EX-IM

Front 9

If ca (net exports) > 0, .....?

Back 9

Trade Surplus

Front 10

If ca (net exports) < 0, .....?

Back 10

Trade Deficit

Front 11

In an open economy:

Back 11

1. Domestic Spending need not equal output

2. Saving need not equal investment.

Front 12

In a closed economy:

Back 12

Saving equals investment.

Front 13

When S>I... ?

Back 13

Net Lender

Front 14

When S<I...?

Back 14

Net Borrower

Front 15

What is intertemporal trade?

Back 15

-A country with a current account deficit is importing present consumption and exporting future consumption.

-A country with a current account surplus is exporting present consumption and importing future consumption.

Front 16

What are some events that increased International Trade?

Back 16

1) Removal of the Berlin Wall (1989)

2) Single European Act (1980s)

3) Inception of the Euro and Expansion of the European Union (2001)

4) NAFTA

5) GATT

Front 17

What was the Removal of the Berlin Wall?

Back 17

1989:

-free enterprise in all Eastern Europe

-privatization of businesses owned by the government.

Front 18

What was the Single European Act?

Back 18

1980s:

Industrialized countries in Europe"

-regulations for more uniform

-remove taxes on goods traded between countries

Front 19

What was the Inception of the Euro?

Back 19

2001

European countries no longer faced the costs and risks associated with converting one currency to another.

Front 20

What is NAFTA?

Back 20

1993

North America Free Trade Agreement

-trade barriers between the US and Mexico were eliminated.

Front 21

What is GATT?

Back 21

General Agreement on Tariffs and Trade

-reduction or elimination of trade restrictions on specified imported goods over 10 year period in 117 countries.

Front 22

What are factors that affect international trade flows?

Back 22

1) Inflation

2) National Income

3) Government policies

4) Exchange Rates

*Impact of some can be offset by others*

Front 23

What are factors affecting DFI?

Back 23

1) Changes in restrictions

2) Privatization

3) Potential Economic Growth

4) Tax Rates

5) Exchange Rates

Front 24

What are factors affecting Portfolio Investment?

Back 24

1) Tax Rates on interest of dividends

2) Interest Rates

3) Exchange Rates

Front 25

What is the impact of the international flow of funds on US interest rates and business investment?

Back 25

1) Interest Rates would be lower

2) Lower cost of borrowing

3) More business opportunities that deserve to be funded.

Front 26

What is IMF?

Back 26

International Monetary Fund:

goal was to assist in the reconstruction of the world's international payment system post WWII.

Front 27

What is IBRD?

Back 27

World Bank:

Aims to reduce poverty in middle income countries and poorer countries (ex: loans).

Front 28

What is WTO?

Back 28

World Trade Organization

provide a forum for multilateral trade negotiation and to settle trade disputes.