AYU BUDI WARDHANI

C1B014048
INTERNATIONAL FINANCIAL MANAGEMENT
INTERNATIONAL FLOW OF FUNDS
When we will learn about the international flow of funds, first we have to understand about the
balance of payments. The balance of payments is a summary of transactions between domestic
and foreign resident for a specific country over a specified period of time. Inflows of funds
generate credits for the countrys balance, while outflows of funds generate debits. Inflows of
funds is when we sell something or we get money. For example export commodities, this means
that our country received foreign currency, which means supply foreign currency increase, and
will have an impact on the increased demand. Because for can be used in Indonesia, foreign
money had to exchange for the rupiah. Outflows of funds is when we buy something, for
example import commodities, the transaction will cause demand foreign currency increased,
because of import have to be paid to foreign money and supply the rupiah increased.
The balance of payments are presented in two groupsa current account, and a capital
account. The current account summarizes the flow of funds between one specified country and
other countries due to purchases of goods or services, or the provision of income in financial
assets. The capital account summarizes the flow of funds resulting from the sale of assets
between one specified country and all other country. The key component of the capital account
are direct foreign investment, portfolio investment, and other capital investment.
Factors affecting international trade flows:
1. Inflation, a relative increase in a countrys inflation rate will decrease its current account,
as import increase and export decrease.
2. National Income, a relative increase in a countrys income level will decrease its current
account, as import increase.
3. Government Restrictions, a government may reduce its countrys imports by imposing a
tariff on imported goods, or by enforcing a quota.
4. Exchange Rate, if a countrys currency begins to rise in value, its current account
balance will decrease as imports increase and exports decrease.
Correcting a balance of trade deficit

By reconsidering the factors that affect the balance of trade, some common correction
methods can be developed.
A floating exchange rate system may correct a trade imbalance automatically since the
trade imbalance will affect the demand and supply of the currencies involved.