2 International Flow of Funds Madura, Chapter 2 (38-63)

2International Flow of FundsInternational Flow of Funds

Madura, Chapter 2 (38-63)

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Objectives

• To explain how the international flow of funds is influenced by economic factors and other factors.

• To describe the functions of the agencies that facilitate international flows.

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• Different countries rely on trade to different extents.

• The trade volume: ¤ European countries: 30 – 40% of GDP¤ U.S. & Japan: 10 – 20% of GDP

• The volume of trade has grown over time for most countries.

International Trade Flows

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• For more U.S. trade-related statistics, visit:¤ http://www.census.gov/foreign-trade/www/¤ http://www.ita.doc.gov/td/industry/otea/

• For worldwide trade statistics, visit:¤ http://www.wto.org/english/res_e/statis_e/

statis_e.htm¤ http://www.worldbank.org/data/

Online Application

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• Recent Changes in North American Trade¤ In 1998, a 1989 free trade pact between U.S.

and Canada was fully phased in.¤ Passed in 1993, the North American Free Trade

Agreement (NAFTA) removes numerous trade restrictions among Canada, Mexico, and the U.S.

¤ In 2001, trade negotiations were initiated for a free trade area of the Americas. 34 countries are involved.

Self-Study


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• Recent Changes in European Trade¤ The Single European Act (1987): to remove

explicit and implicit trade barriers among European countries.

¤ Consumers in Eastern Europe: have more freedom to purchase imported goods.

¤ The single currency system (1999): eliminated the need to convert currencies among participating countries.

Self-Study


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• Trade Agreements Around the World¤ General Agreement on Tariffs and Trade

(GATT) accord (1993) among 117 countries: to call for lower tariffs

¤ Other trade agreements: Association of Southeast Asian Nations European Community Central American Common Market North American Free Trade Agreement


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• Friction (Resistance) Surrounding Trade Agreements - TA can be broken: ¤ when one country is harmed by another

country’s actions.¤ Dumping: exporting of products by one

country to other countries at prices below cost.

¤ Copyright piracy


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• To learn more about the various trade agreements around the world, visit:¤ http://www1.worldbank.org/wbiep/trade/RI_

map.html¤ http://www.worldbank.org/data/wdi2001/pdf

s/tab6_5.pdf¤ http://www.sice.oas.org/tradee.asp

Online Application

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Factors AffectingInternational Trade Flows

• Inflation¤ A relative increase in a country’s inflation

• National IncomeA relative increase in a country’s income level

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• Government Restrictions¤ Tariff & Quota¤ Restrictions on certain products for health

and safety reasons.

• Exchange Rates¤ If a country’s currency begins to rise in

value

Factors AffectingInternational Trade Flows

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Correcting A Balance of Trade Deficit Example of Balance of Trade Deficit

U.S. Balance of Trade Trend

-500

-300

-100

100

300

500

700

900

1100

1300

1960 1965 1970 1975 1980 1985 1990 1995 2000

Bil

lio

ns

of

US

$

U.S. Imports

U.S. Exports

U.S. Balance of Trade

Source: U.S. Census Bureau

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Correcting A Balance of Trade Deficit

BOT = EX-IM

• Measures to increase exports

• Measures to decrease imports

• A floating exchange rate system may correct a trade imbalance automatically since the trade imbalance will affect the demand and supply of the currencies involved.

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• However, a weak home currency may not necessarily improve a trade deficit.¤ Foreign companies may lower their prices to

maintain their competitiveness.¤ Some other currencies may weaken, too.¤ J-curve effect: Many trade transactions are

prearranged and cannot be adjusted immediately

¤ The impact of exchange rate movements on intracompany trade is limited.

Correcting A Balance of Trade Deficit

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J-Curve EffectU

.S.

Tra

de

Bal

ance

0 Time

J Curve

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• Capital flows: ¤ portfolio investment ¤ direct foreign investment(DFI)

• Increase in DFI positions during periods of strong economic growth.

increasing globalization.

International Capital Flows

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Direct Foreign Investment Positions

Source: U.S. Bureau of Economic Analysis

Bil

lio

ns

of

US

$

0

200

400

600

800

1000

1200

1400

1980 1985 1990 1995 2000

DFI by U.S. Firms

DFI in the U.S.

of the United States on a Historical Cost basis

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Distribution of DFI for the U.S.For the Year of 2000

Source: U.S. Bureau of Economic Analysis

DFI by U.S. Firms DFI in the U.S.

Canada10.2%

Other WesternHemisphere19.2% 3.4%

Canada8.1%

France3.1%

Germany4.3%

United Kingdom18.8%

OtherEurope16.6%

Africa1.3%

MiddleEast1.0%

Japan4.5%

Other Asia& Pacific

11.6%

Other Asia & Pacific2.5%

France9.6%

Germany9.9%

Netherlands9.3% 12.3%

United Kingdom18.5%

OtherEurope21.5%

MiddleEast0.7%

Japan13.2%

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Factors Affecting DFI

• Changes in Restrictions¤ New opportunities may arise from the

removal of government barriers.

• Privatization¤ DFI has also been stimulated by the selling

of government operations.

• Potential Economic Growth¤ Countries with higher potential economic

growth are more likely to attract DFI.

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• Tax Rates¤ Countries imposing relatively low tax rates

on corporate earnings

• Exchange Rates¤ Firms will typically prefer to invest their funds

in a country when that country’s currency is expected to strengthen.

Factors Affecting DFI

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Factors Affecting International Portfolio Investment

• Tax Rates on Interest or Dividends¤ Investors will normally prefer countries where

the tax rates are ...

• Interest Rates¤ Money tends to flow to countries with …

• Exchange Rates¤ Foreign investors may be attracted if the local

currency is expected to ...

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• Which countries should you invest in?

Online Application

¤ Consult the Country Commercial Guides prepared by embassy staff at http://www.usatrade.gov/website/ccg.nsf/ccghomepage?openform¤ Visit the Trade Information Center at http://www.trade.gov/td/tic/

¤ Visit the Yahoo! International Finance Center at http://biz.yahoo.com/ifc/

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International Monetary Fund (IMF)

• The IM F is an organization of 183 member countries. Established in 1946, it aims¤ to promote international monetary cooperation

and exchange stability; ¤ to foster economic growth and high levels of

employment; and¤ to provide temporary financial assistance to help

ease imbalances of payments.SELF-STUDY

Agencies that Facilitate International Flows

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• In particular, its compensatory financing facility attempts to reduce the impact of export instability on country economies.

• The IM F uses a quota system, and its unit of account is the SDR (special drawing right).

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• Its operations involve surveillance, and financial and technical assistance.

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• The weights assigned to the currencies in the SDR basket are as follows:

Currency 2001 Revision 1996 Revision

U.S. dollar 45 39Euro 29 Deutsche mark 21 French franc 11Japanese yen 15 18Pound sterling 11 11

SELF-STUDY



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World Bank Group

• Established in 1944, the Group assists development with the primary focus of helping the poorest people and the poorest countries.

• It has 183 member countries, and is composed of five organizations - IBRD, IDA, IFC, MIGA and ICSID.

SELF-STUDY


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IBRD: International Bank for Reconstruction and Development

• Better known as the World Bank, the IBRD provides loans and development assistance to middle-income countries and creditworthy poorer countries.

• In particular, its structural adjustment loans are intended to enhance a country’s long-term economic growth.

SELF-STUDY


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• It may spread its funds by entering into cofinancing agreements with official aid agencies, export credit agencies, as well as commercial banks.

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IBRD: International Bank for Reconstruction and Development

• The IBRD is not a profit-maximizing organization. Nevertheless, it has earned a net income every year since 1948.

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IDA: International Development Association

• IDA was set up in 1960 as an agency that lends to the very poor developing nations on highly concessional terms.

• IDA lends only to those countries that lack the financial ability to borrow from IBRD.

• IBRD and IDA are run on the same lines, sharing the same staff, headquarters and project evaluation standards.

SELF-STUDY


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IFC: International Finance Corporation

• The IFC was set up in 1956 to promote sustainable private sector investment in developing countries, by¤ financing private sector projects;¤ helping to mobilize financing in the international

financial markets; and¤ providing advice and technical assistance to

businesses and governments.

SELF-STUDY


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M IGA: Multilateral Investment Guarantee Agency

• The MIGA was created in 1988 to promote FDI in emerging economies, by ¤ offering political risk insurance to investors

and lenders; and ¤ helping developing countries attract and

retain private investment.

SELF-STUDY


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ICSID: International Centre for Settlement of Investment Disputes

• The ICSID was created in 1966 to facilitate the settlement of investment disputes between governments and foreign investors, thereby helping to promote increased flows of international investment.

SELF-STUDY


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World Trade Organization (WTO)

• Created in 1995, the WTO is the successor to the General Agreement on Tariffs and Trade (GATT).

• It deals with the global rules of trade between nations to ensure that trade flows smoothly, predictably and freely.

• At the heart of the WTO's multilateral trading system are its trade agreements.

SELF-STUDY


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• Its functions include:¤ administering WTO trade agreements;¤ serving as a forum for trade negotiations;¤ handling trade disputes;¤ monitoring national trading policies;¤ providing technical assistance and training for developing

countries; and¤ cooperating with other international groups.

SELF-STUDY¤


World Trade Organization (WTO)

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Bank for International Settlements (BIS)

• Set up in 1930, the BIS is an international organization that fosters cooperation among central banks and other agencies in pursuit of monetary and financial stability.

• It is the “central banks’ central bank” and “lender of last resort.”

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• The BIS functions as:¤ a forum for international monetary and financial

cooperation;¤ a bank for central banks;¤ a center for monetary and economic research; and¤ an agent or trustee in connection with international

financial operations.

SELF-STUDY


Bank for International Settlements (BIS)

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• You may learn more about the IMF at http://www.imf.org.

• To learn more about the World Bank visit:¤ http://www.worldbank.org¤ http://www.worldbank.org/ibrd¤ http://www.worldbank.org/ida¤ http://www.ifc.org¤ http://www.miga.org¤ http://www.worldbank.org/icsid

• To learn more about the WTO & BIS visit:¤ http://www.wto.org¤ http://www.bis.org

Online Application

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Regional Development Agencies

• Agencies with more regional objectives relating to economic development include¤ the Inter-American Development Bank;¤ the Asian Development Bank;¤ the African Development Bank; and¤ the European Bank for Reconstruction and

Development.


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• Check out the following regional agencies:¤ Inter-American Development Bank: http://

www.iadb.org¤ Asian Development Bank: http://

www.adb.org¤ African Development Bank: http://

www.afdb.org¤ European Bank for Reconstruction and

Development: http://www.ebrd.com

Online Application

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• International Trade Flows¤ Distribution of U.S. Exports and Imports¤ U.S. Balance of Trade Trend¤ Recent Changes in North American and

European Trade¤ Trade Agreements Around the World

Review

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Review

• Factors Affecting International Trade Flows¤ Inflation¤ National Income¤ Government Restrictions¤ Exchange Rates¤ Interaction of Factors

• Correcting a Balance of Trade Deficit

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Review

• International Capital Flows¤ Distribution of DFI by U.S. Firms¤ Distribution of DFI in the U.S.¤ Factors Affecting DFI¤ Factors Affecting International Portfolio

Investment

• Agencies that Facilitate International Flows: IMF, WB, WTO, BIS and Regional Development Agencies

2 International Flow of Funds Madura, Chapter 2 (38-63)

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Transcript of 2 International Flow of Funds Madura, Chapter 2 (38-63)