International Financial Management

10th Edition
by Jeff Madura

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 2
International Flow of Funds

Chapter Objectives
This chapter will:

A. Explain the key components of the balance of payment

B. Explain how international trade flows are influenced by economic

factors and other factors

C. Explain how international capital flows are influenced by country

characteristics

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 Balance of Payments

1. Summary of transactions between domestic and

foreign residents for a specific country over a
specified period of time.
a. Current Account: summary of flow of funds due to purchases
of goods or services or the provision of income on financial
assets.
b. Capital Account: summary of flow of funds resulting from
the sale of assets between one specified country and all other
countries over a specified period of time.

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 Current Account

1. Payments for merchandise and services

2. Factor income payments
3. Transfer payments

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 Capital and Financial Accounts

1. Direct foreign investment

2. Portfolio investment
3. Other capital investment
4. Errors and omissions

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 Exhibit 2.4
2008 Distribution
of U.S. Exports
and Imports

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 International Trade Flows

1. Distribution of U.S. Exports and Imports: Canada,

China, Mexico, and Japan are the key exporters to the
United States.
2. U.S. Balance-of-Trade Trend: value has grown
substantially over time.
3. Impact of Huge Balance-of-Trade Deficit: could
lead to higher U.S. unemployment but increases
competition leading to more efficient production.

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 Events That Increased International Trade

1. Removal of the Berlin Wall

2. Single European Act of 1987
3. North American Free Trade Agreement (NAFTA)
4. General Agreement on Tariffs and Trade (GATT)
5. Inception of the Euro
6. Expansion of the European Union
7. Other Trade Agreements

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 Trade Frictions - Examples

1. Environmental restrictions
2. Labor laws
3. Bribes
4. Government subsidies
5. Tax breaks

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 Trade Policies

1. Using the exchange rate as a policy

2. Outsourcing
3. Managerial decisions about outsourcing
4. Using trade policies for security reasons
5. Using trade policies for political reasons

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 Factors Affecting International Trade Flows

1. Inflation: current account decreases if inflation

increases relative to trade partners.
2. National Income: current account decreases if
national income increases relative to other countries.
3. Government Policies
a. Subsidies for exporters
b. Restrictions on imports
c. Lack of restriction on piracy
4. Exchange Rates: current account decreases if
currency appreciates relative to other currencies

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 Limitations of a Weak Home Currency
Solution
1. Counterpricing by competitors
2. Impact of other weak currencies
3. Prearranged international transactions
4. Intracompany trade

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 Exhibit 2.6 J-Curve Effect

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 Factors Affecting DFI

1. Changes in Restrictions
2. Privatization
3. Potential Economic Growth
4. Tax Rates
5. Exchange Rates

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 Exhibit 2.7 Distribution of Global DFI across
Regions in 2007-2008

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 Factors Affecting International Portfolio
Investment
1. Tax rates on Interest or Dividends
2. Interest Rates
3. Exchange Rates

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 Exhibit 2.8 Impact of the International Flow of Funds on U.S.
Interest Rates and Business Investment in the United States.

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 Agencies that Facilitate International Flows

1. International Monetary Fund (IMF)

2. World Bank
3. World Trade Organization (WTO)
4. International Financial Corporation (IFC)
5. International Development Association (IDA)
6. Bank for International Settlements (BIS)
7. Organization for Economic Cooperation and
Development (OECD)
8. Regional development agencies

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