Basics of International Finance National income accounting Records all the expenditures that contribute to a country’s income and output Balance of payments accounting Helps us keep track of both changes in a country’s indebtedness to foreigners and the fortunes of its export- and import-competing industries Gross national product (GNP) The value of all final goods and services produced by a country’s factors of production and sold on the market in a given time period. It is the basic measure of a country’s output.

The National Income Identity for an Open Economy It is the sum of domestic and foreign expenditure on the goods and services produced by domestic factors of production: Y = C + I + G + EX – IM (12-1) where: Y is GNP C: The amount consumed by private domestic residents I : The amount put aside by private firms to build new plant and equipment for future production G is government purchases EX is exports IM is imports In a closed economy, EX = IM = 0.

The Current Account and Foreign Indebtedness Current account (CA) balance The difference between exports of goods and services and imports of goods and services (CA = EX – IM) A country has a CA surplus when its CA > 0. A country has a CA deficit when its CA < 0. CA measures the size and direction of international borrowing. A country’s current account balance equals the change in its net foreign wealth. Example: Canada imports 20 bushels of wheat and exports only 10 bushels of wheat. The current account deficit of 10 bushels is the value of Canada’s borrowing from foreigners, which the country will have to repay in the future.

The Balance of Payments Accounts (BOP) Three types of international transactions are recorded in the balance of payments: Exports or imports of goods or services Purchases or sales of financial assets Money, Stocks, government debt and purchase/sale of factories Transfers of wealth between countries They are recorded in the capital account. Capital Account: -result from non-market activities, or represent the acquisition or disposal of nonproduced, nonfinancial assets. Person moves to canada with her savings Foreign aid/ forgiveness of debt

Double-entry book keeping-BOP Each transaction enters the BOP twice, once as a credit and once as a debit Example: A U.S. citizen pays $200 for dinner at a French restaurant in France by charging his Visa credit card. That is, the U.S. trades assets for services. This transaction creates the following two offsetting entries in the U.S. balance of payments: It enters the U.S. CA with a negative sign (-$200). It shows up as a $200 credit in the U.S. financial account.

Double-entry book keeping-BOP 2003 Class of Econ 355 is so generous that it gives $5000 in foreign aid to Nisha in India. This transaction creates the following two offsetting entries It enters the Canadian capital account with a negative sign (-$5000). It shows up as a $5000 credit in the Canadian financial account.

The Fundamental BOP Identity Any international transaction automatically gives rise to two offsetting entries in the balance of payments resulting in a fundamental identity: Current account + financial account + capital account = 0 ************************************************************************** Capital Inflow and Outflow Financial inflow also called -(capital inflow) A loan from the foreigners with a promise that they will be repaid Financial outflow also called - (capital outflow) A transaction involving the purchase of an asset from foreigners The loan enters financial account with a positive sign. The Canadian govt. is selling them an asset – a promise that this loan will be repaid in the future. A financial inflow is sometimes also called a capital inflow.

Official Reserve Transactions Central bank-US/ (Bank of Canada) The institution responsible for managing the supply of money Official international reserves Foreign assets held by central banks as a cushion against national economic misfortune Official foreign exchange intervention Central banks often buy or sell international reserves in private asset markets to affect macroeconomic conditions in their economies.

Goals of “Bank of Canada” Low and Stable Inflation A safe and secure currency Financial Stability The Efficient management of Govt. funds and Public Debt

Case of Champagne etc. EUROPEAN COMMUNITIES – PROTECTION OF TRADEMARKS AND GEOGRAPHICAL INDICATIONS FOR AGRICULTURAL PRODUCTS AND FOODSTUFFS Request for the Establishment of a Panel by the United States

Geographical indications geographical indications are place names (or words associated with a place) used to identify products (for example, “Champagne”, “Tequila” or “Roquefort”) which have a particular quality, reputation or other characteristic because they come from that place. The TRIPS (Trade-Related Aspects of Intellectual Property Rights )Agreement provides a higher level of protection for geographical indications for wines and spirits (i.e., subject to a number of exceptions, they have to be protected even if misuse would not cause the public to be misled).

Canada - Certain Measures Affecting the Automotive Industry Canada - Export Credits and Loan Guarantees for Regional Aircraft - Report of the Panel (28/01/2002) Canada - Certain Measures Affecting the Automotive Industry This dispute concerns Canadian measures which accord to certain motor-vehicle manufacturers established in Canada the right to import motor vehicles with an exemption from the generally applicable customs duty. an eligible manufacturer's local production of motor vehicles (including in certain cases the production of parts) must achieve a minimum amount of Canadian value added (CVA)

Canada – Measures Affecting the Importation of Milk and the Exportation of Dairy Products The Government of Canada is providing subsidies, and in particular export subsidies, on dairy products through its national and provincial pricing arrangements for milk and other dairy products without regard to the export subsidy reduction and other WTO commitments undertaken by Canada. Specifically, the Government of Canada established and maintains a system of special milk classes through which it maintains high domestic prices, promotes import substitution, and provides export subsidies for dairy products going into world markets. These practices distort markets for dairy products and adversely affect US sales of dairy products