Chapter 2

International Flow of Funds

South-Western/Thomson Learning © 2006

 Chapter Objectives

■ To explain the key components of the

balance of payments; and
■ To explain how the international flow of
funds is influenced by economic factors
and other factors.

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 Factors Affecting
International Trade Flows
• Impact of Inflation
¤ A relative increase in a country’s inflation
rate will decrease its current account, as
imports increase and exports decrease.
• Impact of National Income
¤ A relative increase in a country’s income
level will decrease its current account, as
imports increase.

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 Factors Affecting
International Trade Flows
• Impact of Credit Crisis on Trade
Due to credit crisis spending for imported
products declined. MNCs cut back their
plans to boost exports.
International trade is commonly facilitated
by letter of credits, which are issued by
commercial banks of importers promising
to make payment upon delivery.

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 Factors Affecting
International Trade Flows
• Impact of Government Policies
Such as
• Subsidies for Exporters
• Restrictions on Imports
• Lack of Restrictions on Piracy

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 Factors Affecting
International Trade Flows
• Subsidies for Exporters
• Some governments offer subsidies to their
domestic firms, so that those firms can
produce products at a lower cost than their
global competitors. Thus, the demand for the
exports produced by those fi rms is higher as
a result of subsidies.

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 Factors Affecting
International Trade Flows
• Restrictions on Imports
• 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 tariffs, a government can
reduce its country’s imports by enforcing a
quota, or a maximum limit that can be
imported.
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 Factors Affecting
International Trade Flows
• Lack of Restrictions on Piracy

In some cases, a government can affect

international trade flows by its lack of
restrictions on piracy.

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