© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. International Financial Management 10 th Edition by Jeff Madura 1

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 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 2

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3 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.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 Current Account 1.Payments for merchandise and services 2.Factor income payments 3.Transfer payments

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 Capital and Financial Accounts 1.Direct foreign investment 2.Portfolio investment 3.Other capital investment 4.Errors and omissions

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6 Exhibit Distribution of U.S. Exports and Imports 6

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7 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.

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8 Events That Increased International Trade 1.Removal of the Berlin Wall 2.Single European Act of 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

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9 Trade Frictions - Examples 1.Environmental restrictions 2.Labor laws 3.Bribes 4.Government subsidies 5.Tax breaks

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10 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

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11 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

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 12 Limitations of a Weak Home Currency Solution 1.Counterpricing by competitors 2.Impact of other weak currencies 3.Prearranged international transactions 4.Intracompany trade

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 Exhibit 2.6 J-Curve Effect 13

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14 Factors Affecting DFI 1.Changes in Restrictions 2.Privatization 3.Potential Economic Growth 4.Tax Rates 5.Exchange Rates

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15 Exhibit 2.7 Distribution of Global DFI across Regions in

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16 Factors Affecting International Portfolio Investment 1.Tax rates on Interest or Dividends 2.Interest Rates 3.Exchange Rates

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 17 Exhibit 2.8 Impact of the International Flow of Funds on U.S. Interest Rates and Business Investment in the United States. 17

© 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 18 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