Khoa Tài Chính

School Doanh Nghiệp

of Finance

International Flow of Funds

International Finance
 Contents
 How can balance of payment measure the
flow of international transactions?
 The key components of the balance of
payments
 Current Account
 Capital and Financial Accounts
International flow of funds

The balance of payments is a measure

of international transactions between
domestic and foreign residents over a
specified period of time.
 International flow of funds
The international balance of payments measures
international capital flows through the following
three factors:
1. Identifying international economic transaction.
2. Understanding the bookkeeping procedures for
the balance of payments accounting.
3. Understanding how the flow of goods, services,
assets and money creates debit and credit to
balance of payments.
 Accounting principles for balance of payment

Suppose that an American corporation sells $2 million

worth of US-manufactured jeans to Britain, and the
British buyer pays from a US dollar account that is kept
in a US bank. We will then have the following double
entry in the US balance of payments:

(credits +; debits –)
Millions dollars
Export (of jeans) +2
Foreign assets in the US: US -2
bank liabilities
 Accounting principles for balance of payment
Suppose that an American corporation purchases $5
million worth of denim cloth from a British
manufacturer, and that the British company puts the $5
million it receives into a bank account in the United
States. We then have the double entry in the US
account:
(credits +; debits –)
Millions dollars
Imports (of cloth) -5
Foreign assets in the US: +5
US bank liabilities
Balance of payment Structure

Two main
accounts
 Errors and omissions
The time that current account entries
are made differs from the time for
payments involved.
Many entries are estimates
Illegal transactions
 Current account

The current account is the broadest measure of

international trade in goods and services of a country,
consisting of the following four components:

1. Trade balance
2. Service balance
3. Factor income
4. Current transfer
 Current account

The most influential factors are:

 Inflation

 National income

 Exchange rates

 Government policies
Current account – influential factors:

Impact of inflation

If a country’s inflation rate increases relative to

trade partners, its current account will be
decreased, when other things being equal.
Current account – influential factors:

Impact of National Income

If national income increases by a higher percentage

than those of other countries, its current account is
expected to decrease, other things being equal.
Current account – influential factors :

Impact of Government Policies

If a country’s government imposes a tax on imported

goods (often referred to as a tariff), the prices of
foreign goods to consumers are effectively increased.
In addition to imposing restrictions, government has
other ways of affecting current accounts as well.
Current account – influential factors:

Impact of Exchange Rates

If a country’s currency begins to rise in value against
other currencies, its current account balance should
decrease, other things being equal.
 The relationship between the dollar
exchange rate and the actual US export.
US US Index
dollar
Net export value
(Left axis) 160

140

120
Value of US dollar
(Right axis)
100

80
1975 1977 1979 1981 1983 1985 1987
 J-Curve Effect

The phenomenon of an initial worsening and

subsequent improvement of the trade balance after
a depreciation is known as the J-curve effect.
Group discussion
Explain the J-curve effect
when domestic currency is
appreciated
 Capital/Financial account

The capital / financial account measures all

international economic transactions related to
financial assets. It is divided into two main
categories: Capital Account and Financial Account.
 Capital/Financial account

Capital accounts are created by transferring

financial assets or transactions involving the change
of ownership of non-financial assets.
 Capital/Financial account

The financial account is divided into three parts:

• Foreign direct investment (FDI)

• Foreign portfolio investment (FPI)

• Other investment forms

Factors affecting financial account

• The volatility of exchange rates

• Demographic

• Capital control policy

 Capital control policies

Capital control is the implementation of

government interventions in many forms, to
influence (limit) foreign capital flows, in order
to achieve a certain goal of government
 DISCUSSION

Is a current account deficit

always bad for a country?