International Finance Mainly on Balance of Payments

International Flow of Funds Research Project

IBM 312 International Finance

Worth 10% of your final grade

Groups of no more than three students.

This assignment requires you to consider your country’s balance of payments position and the potential for it to suffer a debt crisis (unable to service its debt repayments).

A debt crisis can occur if a country with a weak economy is not able to repay external debt due to the inability to produce and sell goods and make a profitable return.

As a brief summary of our class discussion of the balance of payments, recall the possible implications from the various entries recorded.

Goods trade (merchandise trade, easiest to count; a surplus represents a + in the balance of payments, creates a demand for that country’s currency)

Services trade (call centers, tourism, transportation, financial, and business services)

Income (net earnings from investment abroad by a country’s residents or the labor income they earn abroad)

Transfers (receipt of foreign aid or gifts from private individuals who live abroad – an individual who remains abroad but makes a gift to family back in the home country will be included in remittances.)

Current Account Balance – the sum of the four items above. A current account surplus indicates a country that produces more than it spends, and the resultant savings allow it to acquire foreign assets. For countries with a deficit, the CA/GDP percentage is a good indicator of the extent to which they depend upon foreign saving to finance investment within the country.

Foreign direct investment – Management control of the foreign assets that are acquired, an entry where investment by multinational corporations shows up, an item that is not as likely to be reversed if the country faces a crisis. An inflow of FDI represents a + in the balance of payments.

Portfolio investment – Sales of shares of stock or bonds to foreign buyers show up as a +. Implies the existence of...