ECONOMICS/FINANCE 372 International Finance

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ECONOMICS/FINANCE 372 International Finance. - PowerPoint PPT Presentation

Transcript of ECONOMICS/FINANCE 372 International Finance

  • ECONOMICS/FINANCE 372International Finance

    Course Objective: To develop an understanding of the significance that the existence of different currencies around the world has on economic and financial activity. The causes and effects of exchange rate behavior will be investigated. As in any economics course, the effects of government policies and the role of government are considered. As in any finance course, the profound influence that uncertainty (a.k.a. risk) has on economic and financial behavior is emphasized.

  • The Balance of Payments (BOP) Accounts:A record of all economic activity that flows between residents of a country and residents of the rest of the world in a given period of time (e.g., a year), where all values are in terms of the countrys own currency.

  • The two primary component accounts of the BOP accounts are: 1) the Capital and Financial Account (formerly known just as the Capital Account) 2) the Current Account. All transfers of asset ownership are recorded in the Capital and Financial Account (KFA) All other flows (e.g., of goods, services) across the countrys borders are recorded in the Current Account (CA).

  • BOP accounting employs double-entry bookkeeping: For every credit there is a debit, and For every debit there is a credit.

  • Credits in the CA: a flow (of goods or services) that gives rise to a payment inward from a non-resident. Debits in the CA: a flow (of goods or services) that gives rise to a payment outward to a non-resident. Credits in the KFA: the transfer of the ownership of an asset from a resident to a nonresident.Debits in the KFA: the transfer of the ownership of an asset from a nonresident to a resident.

  • The Current Account is divided into 3 sub-accounts: The goods account (CAG) records the flows of goods (across the borders)The services account (CAS) records the flows of services The factor services account (CAFS) records the flows of factor services. CA = CAG + CAS + CAFS

  • The Capital and Financial Account (KFA) is also divided into 3 sub-accounts:The long term, private financial account (KFALP) records the flows of the transfer of ownership across the border of long-term assets by private individuals and institutions. The short-term, private financial account (KFASP) records the transfer of short-term assets by private individuals and institutions.The government financial account (KFAGOV) records the acquisition or sale of another countrys currency by the countrys monetary authority. KFA = KFALP + KFASP + KFAGOV

  • Debit Credit Debit Credit Debit CreditDebit Credit Debit Credit Debit CreditCAG CAS CAFS KFALP KFASP KFAGOV

  • There are several Key Balances that are constructed using these six sub-accounts:Trade Balance = CAGBasic Balance = CA + KFALPOfficial Reserves Transactions Balance (ORTB) (a.k.a. Overall Balance, or, Official Settlements Balance, or, The Balance of Payments or BOP) =CA + KFALP + KFASP

    KFAPRIVATE = KFALP + KFASP

  • Debit Credit Debit Credit Debit CreditDebit Credit Debit Credit Debit CreditCAG CAS CAFS KFALP KFASP KFAGOV A US resident pays a Canadian $10 in exchange for preparing her taxes, paying with a check on a Chicago bank.

  • Debit Credit Debit Credit Debit CreditDebit Credit Debit Credit Debit CreditCAG CAS CAFS KFALP KFASP KFAGOV $10 Tax preparation ($10 worth) is provided by the Canadian accountant to the US resident

  • Debit Credit Debit Credit Debit CreditDebit Credit Debit Credit Debit CreditCAG CAS CAFS KFALP KFASP KFAGOV $10 $10 The US resident gives the Canadian a check for $10

  • Debit Credit Debit Credit Debit CreditDebit Credit Debit Credit Debit CreditCAG CAS CAFS KFALP KFASP KFAGOV $10 $10 Key Balances: The CURRENT ACCOUNT (CA) = -$10 (is in deficit by $10)

  • Debit Credit Debit Credit Debit CreditDebit Credit Debit Credit Debit CreditCAG CAS CAFS KFALP KFASP KFAGOV $10 $10 Key Balances: The CAPITAL AND FINANCIAL ACCOUNT (KFA) = +$10 (is in surplus by $10)

  • Debit Credit Debit Credit Debit CreditDebit Credit Debit Credit Debit CreditCAG CAS CAFS KFALP KFASP KFAGOV $10 $10 Key Balances: The BASIC BALANCE (BB) = CA + KFALP = -$10

  • Debit Credit Debit Credit Debit CreditDebit Credit Debit Credit Debit CreditCAG CAS CAFS KFALP KFASP KFAGOV $10 $10 Key Balances: The (Merchandise) TRADE BALANCE (TB) = CAG = $0

  • Debit Credit Debit Credit Debit CreditDebit Credit Debit Credit Debit CreditCAG CAS CAFS KFALP KFASP KFAGOV $10 $10 Key Balances:The BALANCE OF PAYMENTS (BOP) = CA + KFALP + KFASP = $0

  • A UK resident buys a 5-yr US government bond (from an American) for $20, pays with a check on a British bank.

  • Debit Credit Debit Credit Debit CreditDebit Credit Debit Credit Debit CreditCAG CAS CAFS KFALP KFASP KFAGOV $10 $20 $10 The British resident takes ownership of the $20 LT Bond.

  • Debit Credit Debit Credit Debit CreditDebit Credit Debit Credit Debit CreditCAG CAS CAFS KFALP KFASP KFAGOV $10 $20 $20 $10 The British resident gives the $20 check to the American.

  • Debit Credit Debit Credit Debit CreditDebit