Transcript Document
ECONOMICS/FINANCE 372 International 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 country’s 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 country’s 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 longterm 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 country’s currency by the country’s monetary authority. KFA = KFALP + KFASP + KFAGOV Debit CAG Credit Debit KFALP Debit Credit CAS Credit KFASP Debit Credit Debit CAFS Credit KFAGOV Debit Credit There are several “Key Balances” that are constructed using these six sub-accounts: Trade Balance = CAG Basic Balance = CA + KFALP Official 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 CAG Credit Debit KFALP Debit Credit CAS Credit KFASP Debit Credit Debit CAFS Credit KFAGOV Debit Credit A US resident pays a Canadian $10 in exchange for preparing her taxes, paying with a check on a Chicago bank. Debit CAG Credit CAS Debit Credit Debit CAFS Credit $10 KFALP Debit Credit KFASP Debit Credit KFAGOV Debit Credit Tax preparation ($10 worth) is provided by the Canadian accountant to the US resident Debit CAG Credit CAS Debit Credit Debit CAFS Credit $10 KFALP Debit Credit KFASP Debit Credit KFAGOV Debit $10 The US resident gives the Canadian a check for $10 Credit Debit CAG Credit CAS Debit Credit Debit CAFS Credit $10 KFALP Debit Credit KFASP Debit Credit KFAGOV Debit Credit $10 Key Balances: The CURRENT ACCOUNT (CA) = -$10 (is in deficit by $10) Debit CAG Credit CAS Debit Credit Debit CAFS Credit $10 KFALP Debit Credit KFASP Debit Credit KFAGOV Debit Credit $10 Key Balances: The CAPITAL AND FINANCIAL ACCOUNT (KFA) = +$10 (is in surplus by $10) Debit CAG Credit CAS Debit Credit Debit CAFS Credit $10 KFALP Debit Credit KFASP Debit Credit KFAGOV Debit $10 Key Balances: The BASIC BALANCE (BB) = CA + KFALP = -$10 Credit Debit CAG Credit CAS Debit Credit Debit CAFS Credit $10 KFALP Debit Credit KFASP Debit Credit KFAGOV Debit Credit $10 Key Balances: The (Merchandise) TRADE BALANCE (TB) = CAG = $0 Debit CAG Credit CAS Debit Credit Debit CAFS Credit $10 KFALP Debit Credit KFASP Debit Credit KFAGOV Debit Credit $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 CAG Credit CAS Debit Credit Debit CAFS Credit $10 KFALP Debit Credit $20 KFASP Debit Credit KFAGOV Debit Credit $10 The British resident takes ownership of the $20 LT Bond. Debit CAG Credit CAS Debit Credit Debit CAFS Credit $10 KFALP Debit Credit $20 KFASP Debit $20 Credit KFAGOV Debit Credit $10 The British resident gives the $20 check to the American. Debit CAG Credit CAS Debit Credit Debit CAFS Credit $10 KFALP Debit Credit $20 CA = -10 KFA = +10 KFASP Debit $20 Credit KFAGOV Debit Credit $10 BB = +10 BOP = 0 TB = 0 A US resident receives $30 in interest payments on her 6-mo Peruvian bonds, paid with a check on a Peruvian bank. Debit CAG Credit CAS Debit Credit Debit $10 KFALP Debit Credit $20 $20 Credit $30 KFASP Debit CAFS Credit KFAGOV Debit Credit $10 A US resident provides services to the Peruvian borrower worth $30. Debit CAG Credit CAS Debit Credit Debit $10 KFALP Debit Credit $20 $20 $30 Credit $30 KFASP Debit CAFS Credit KFAGOV Debit Credit $10 A US resident receives the $30 check on the Peruvian bank. Debit CAG Credit CAS Debit Credit Debit $10 KFALP Debit Credit $20 $20 $30 Credit $30 KFASP Debit CAFS Credit KFAGOV Debit Credit $10 KFASP = - $40 (is in deficit by $40) CA = +20 KFA = -20 BB = +40 BOP = 0 TB = 0 US Government buys $40 worth of Yen in the foreign exchange markets with newly printed $’s. Debit CAG Credit CAS Debit Credit Debit CAFS $10 KFALP Debit Credit $20 $30 KFASP Debit $20 $30 Credit Credit $10 KFAGOV Debit Credit $40 US Government puts $40 worth of Yen in its vault. Debit CAG Credit CAS Debit Credit Debit CAFS $10 KFALP Debit Credit $20 $30 KFASP Debit $20 $30 Credit Credit $10 $40 KFAGOV Debit Credit $40 A foreign resident takes possession of 40 newly printed $’s. Debit CAG Credit CAS Debit Credit Debit CAFS $10 KFALP Debit Credit $20 $30 KFASP Debit $20 $30 Credit Credit $10 $40 KFAGOV Debit Credit $40 KFASP = 0 (is in balance) CA = +20 KFA = -20 BB = +40 BOP = +40 TB = 0 A US resident pays $50 for a 180-day Japanese government security, pays with a Houston bank check. Debit CAG Credit CAS Debit Credit Debit CAFS $10 KFALP Debit Credit $20 $30 KFASP Debit $20 $30 $50 Credit Credit $10 $40 KFAGOV Debit Credit $40 A US resident takes ownership of the 180-day Japanese government security (worth $50). Debit CAG Credit CAS Debit Credit Debit CAFS $10 KFALP Debit Credit $20 $30 KFASP Debit $20 $30 $50 Credit Credit $10 $40 $50 KFAGOV Debit Credit $40 The Japanese government takes possession of the $50 check on the US bank from the US resident. Debit CAG Credit CAS Debit Credit Debit CAFS Credit $10 KFALP Debit Credit $20 $30 KFASP Debit $20 $30 $50 KFASP = 0 CA = +20 KFA = -20 KFAGOV Credit $10 $40 $50 Debit Credit $40 BB = +40 BOP = +40 US firm sells $60 in lumber to Taiwan firm and is paid with a check on the Taiwan’s firm account in a US bank. Debit CAG Credit $60 Credit $20 Credit Debit CAFS $10 KFALP Debit CAS Debit $30 KFASP Debit $20 $30 $50 Credit Credit $10 $40 $50 KFAGOV Debit $40 US firm delivers $60 in lumber to Taiwan firm. Credit Debit CAG Credit $60 Credit $20 Credit Debit CAFS $10 KFALP Debit CAS Debit $30 KFASP Debit $20 $30 $50 $60 Credit Credit $10 $40 $50 KFAGOV Debit Credit $40 The Taiwan firm gives the check for $60 on the US bank to the US seller. Debit CAG Credit $60 Credit Debit CAFS Debit $20 $30 $50 $60 Credit $30 KFASP $20 CA = +80 Credit $10 KFALP Debit CAS Debit Credit $10 $40 $50 KFAGOV Debit $40 KFA = -80 KFASP = -60 BB = +100 BOP = +40 TB = +60 Credit 1. A US resident pays a Canadian $10 in exchange for preparing her taxes, paying with a check on a Chicago bank. 2. A UK resident buys a 5-yr US government bond (from an American) for $20, pays with a check on a British bank. 3. A US resident receives $30 in interest payments on her 6-mo Peruvian bonds, paid with a check on a Peruvian bank. 4. US Government buys $40 worth of Yen in the foreign exchange markets with newly printed $’s. 5. A US resident pays $50 for a 180-day Japanese government security, pays with a Houston bank check. 6. US firm sells $60 in lumber to Taiwan firm and is paid with a check on the Taiwan’s firm account in a US bank.