International Finance - International Flow of Funds

Spring 2014 - Class “A” Weekends – International Business Track

29/8/2014

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To explain the key components of the balance of payments; and  To explain how the international flow of funds is influenced by economic factors and other factors.  Explain how international capital flows are influenced by country characteristics.

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The balance of payments is a summary of transactions between domestic and foreign residents for a specific country over a specified period of time. Accounts for transactions by business, individuals and government. Inflows of funds generate credits for the country’s balance, while outflows of funds generate debits.

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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 the balance of trade, factor income, and transfer payments.

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Difference between total Exports and Imports of goods or services. Export Import Inflow outflow Credit Debit

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Balance of trade = total exports – total Imports

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T. Export

T.Import

balance deficit

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Income from interest and dividend payment received by investors on foreign investment in securities.

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FI received

FI paid

Inflow

outflow

Credit

Debit

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Aids Grants

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Gifts

(in billions of $) (1) U.S. exports of goods + (2) U.S. exports of services + (3) U.S. income receipts

+ $712 + 292 + 275

= (4) Total U.S. exports & income receipts

(5) U.S. imports of goods + (6) U.S. imports of services + (7) U.S. income payments = (8) Total U.S. imports & income payments (9) Net transfers by the U.S.

=$1,279

– $1,263 – 246 – 259 = $1,768 – $68 $557

(10) Current account balance = (4) – (8) – (9) –

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The capital 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...