Transcript Document

Foundations of Multinational Financial
Management
5th Edition
Alan Shapiro
J.Wiley & Sons
Power Points by
Joseph F. Greco, Ph.D.
California State University, Fullerton
1
THE BALANCE OF PAYMENTS
AND INTERNATIONAL LINKAGES
CHAPTER 5
2
CHAPTER OVERVIEW
I.
II.
III.
BALANCE-OF-PAYMENT CATEGORIES
THE INTERNATIONAL FLOW OF
GOODS, SERVICES,AND CAPITAL
COPING WITH CURRENT ACCOUNT
DEFICITS
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PART I. BALANCE-OF-PAYMENT
CATEGORIES
A.THE BALANCE OF PAYMENTS (B-O-P)
1.
PURPOSE:
Measures all financial and economic
transactions over a specified period
of time.
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BALANCE-OF-PAYMENT
CATEGORIES
2. Double-entry bookkeeping
a.
Currency inflows = credits earn
foreign exchange
b.
Currency outflows = debits expend
foreign exchange
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BALANCE-OF-PAYMENT
CATEGORIES
3. Three Major Accounts:
a.
Current
b.
Capital
c.
Official Reserves
4. Current Account
records net flow of goods, services,
and unilateral transfers.
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BALANCE-OF-PAYMENT
CATEGORIES
5. Capital Account
a.
Function: records public and private
investment and lending.
b. Inflows = credits
c. Outflows = debits
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BALANCE-OF-PAYMENT
CATEGORIES
5. Capital Account (con’t)
d. Transactions classified as
1.) Portfolio
2.) Direct
3.) Short term
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BALANCE-OF-PAYMENT
CATEGORIES
6.
Official Reserves Account
a. Function:
1.) Measures changes in international
reserves owned by central banks.
2.) Reflects surplus/deficit of
a.) Current account
b.) Capital account
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BALANCE-OF-PAYMENT
CATEGORIES
6. Official Reserves Account (con’t)
b. Reserves consist of
1.) Gold
2.) Convertible securities
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BALANCE-OF-PAYMENT
CATEGORIES
7. Net Effects:
a.
Sum of all transactions must be
zero:
1.) Current account
2.) Capital account
3.) Official reserves
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BALANCE-OF-PAYMENT
CATEGORIES
8.
The Balance-of-payment measures
a. Some Definitions:
1.) Basic Balance
a.) Consists of current account
and long-term capital flows.
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BALANCE-OF-PAYMENT
CATEGORIES
1.) Basic Balance (con’t)
b.) Emphasizes long-term trends.
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BALANCE-OF-PAYMENT
CATEGORIES
1.) Basic Balance (con’t)
c.) Excludes short-term capital flows that
heavily depend on temporary factors.
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BALANCE-OF-PAYMENT CATEGORIES
2.) Net Liquidity Balance:
Measures the change in private
domestic borrowing or lending
require to keep payments equal
without adjusting official reserves.
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BALANCE-OF-PAYMENT
CATEGORIES
3.)
Official Reserve Transactions Balance
-Measures adjustments needed
by official reserves.
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PART II. THE INTERNATIONAL FLOW OF
GOODS, SERVICES, AND CAPITAL
II. LINKS FROM INTERNATIONAL TO DOMESTIC
FLOWS
A. Global Linkages
set of basic macroeconomic identities which link:
-Domestic spending and production to current
and capital accounts.
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THE INTERNATIONAL FLOW OF
GOODS, SERVICES, AND CAPITAL
B.
Domestic Savings and Investment
and the Capital Account
1.
National Income Accounting
a.
National Income (NI) is either
spent (C) or saved (S)
NI = C + S
(5.1)
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THE INTERNATIONAL FLOW OF
GOODS, SERVICES, AND CAPITAL
b.
National spending (NS) is
divided into personal spending (C)
and investment (I)
NS = C + I
(5.2)
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THE INTERNATIONAL FLOW OF
GOODS, SERVICES, AND CAPITAL
c.
Subtracting (4.2) - (4.1)
NI - NS = S - I
(5.3)
If NI >NS, S > I which implies that surplus
capital spent overseas.
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THE INTERNATIONAL FLOW OF
GOODS, SERVICES, AND CAPITAL
d.
e.
In a freely-floating system,
excess saving = the capital
account balance
Implications:
1.
A nation which produces more
than it spends will save more
than it invests domestically
with a net capital outflow
producing a capital account
deficit.
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THE INTERNATIONAL FLOW OF
GOODS, SERVICES, AND CAPITAL
2.
A nation which spends more
than it produces has a net
capital inflow producing a capital
account surplus.
3.
A healthy economy will tend to
run a current account deficit.
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THE INTERNATIONAL FLOW OF
GOODS, SERVICES, AND CAPITAL
C. THE LINK BETWEEN THE CURRENT AND CAPITAL
ACCOUNTS
1.
Beginning identity
NI - NS = X - M
(5.4)
where X = exports
M = imports
X-M=current account balance (CA)
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THE INTERNATIONAL FLOW OF
GOODS, SERVICES, AND CAPITAL
2.
3.
Combining (5.3) + (5.4)
S - I = X - M
(5.5)
If S - I = Net Foreign Investment
(NFI)
NFI = X - M
(5.6)
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THE INTERNATIONAL FLOW OF
GOODS, SERVICES, AND CAPITAL
4.
Implications:
a.
If CA is in surplus, the nation must be a
net exporter of capital.
b.
If CA is a deficit, the nation is a major
capital importer.
c.
When NS > NI, the excess must be
acquired through foreign trade.
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THE INTERNATIONAL FLOW OF
GOODS, SERVICES, AND CAPITAL
d. Solutions for Improving CA deficits:
1.)
Raise national income (output)
relative to domestic investment (I).
2.)
Increase (S) relative to domestic
investment (I).
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THE INTERNATIONAL FLOW OF
GOODS, SERVICES, AND CAPITAL
D. GOVERNMENT BUDGETS AND
CURRENT ACCOUNT DEFICITS
1. CURRENT ACCOUNT BALANCE
CA = Saving Surplus - Gov’t budget deficit
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THE INTERNATIONAL FLOW OF
GOODS, SERVICES, AND CAPITAL
2. CA Deficit means:
The nation is not saving enough to finance
(I) and the deficit.
3. CA Surplus means:
The nation is saving more than needed to
finance its (I) and deficit.
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PART III. COPING WITH THE CURRENT
ACCOUNT DEFICIT
I.
POSSIBLE SOLUTIONS UNLIKELY TO
WORK:
A.
Currency Depreciation
B.
Protectionism
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COPING WITH THE CURRENT ACCOUNT
DEFICIT
II.CURRENCY DEPRECIATION
A.
U.S. Experience:
Does not improve the trade deficit.
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COPING WITH THE CURRENT
ACCOUNT DEFICIT
B. Depreciations are ineffective because
1.
It takes time to affect trade.
2.
J-Curve Effect
States that a decline in currency value
will initially worsen the deficit before
improvement.
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THE J - CURVE
Net
change
in trade
balance
Currency
depreciation
Trade balance
improves
TIME
0
Trade balance
initially deteriorates
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COPING WITH THE CURRENT
ACCOUNT DEFICIT
III.
PROTECTIONISM
A.
Trade Barriers used:
1.
Tariffs
2.
Quotas
B.
Results:
Most likely will reduce both X and M.
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COPING WITH THE CURRENT
ACCOUNT DEFICIT
C. FOREIGN OWNERSHIP
One protectionist solution would place
limits on or eliminate foreign ownership
leading to capital inflows.
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COPING WITH THE CURRENT
ACCOUNT DEFICIT
D.
STIMULATE NATIONAL SAVING
change the tax regulations and rates.
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COPING WITH THE CURRENT
ACCOUNT DEFICIT
III.
SUMMARY: CURRENT-ACCOUNT
DEFICITS
- neither bad nor good inherently
1.
Since one country’s exports are
another’s imports, it is not possible
for all to run a surplus
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COPING WITH THE CURRENT
ACCOUNT DEFICIT
2. Deficits may be a solution to the problem of
different national propensities to save and
invest.
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