international finance: an overview

INTERNATIONAL FINANCE: AN OVERVIEW

BALANCE OF PAYMENTS

A balance of payments (BOP) sheet is an accounting record of all monetary transactions between a country and the rest of the world.

These transactions include payments for the country's exports and imports of goods, services, and financial capital, as well as financial transfers.

Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items.

Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items.

BALANCE OF PAYMENTS

The BOP is divided into 2 accounts• The Current account • The Capital accountThe Current Account:• A broad measure that includes merchandise

trade and service trade.

The Capital Account• A record of all long term direct investment,

portfolio investment and other short term, long term capital flows

• Refer Table 2.5 @ Page 93

BALANCE OF PAYMENTS-THAILANDBank of Thailand

EC_XT_010 : Balance of Payments (Summary)

(Unit : Millions of Baht) Last Updated : 31 May 2011 14:32 Retrieved date : 08 Jun 2011 13:43

2010 2009 2008 2007

1 Exports (f.o.b.) 6,120,927.59 5,155,054.37 5,831,085.78 5,212,208.04

2 (% change) 18.73 -11.59 11.87 7.72

3 Imports (c.i.f.) -5,681,327.14 -4,485,935.34 -5,845,351.76 -4,773,127.13

4 (% change) 26.64 -23.25 22.46 -0.64

5 Trade balance 439,600.44 669,119.03 -14,265.97 439,080.90

6 Net services income & transfers 23,963.61 85,355.33 81,646.47 100,623.25

7 Current account balance 463,564.05 754,474.37 67,380.49 539,704.16

8 Capital and financial account 503,431.31 -101,685.89 399,828.21 -61,663.39

9 Monetary authorities 82,631.52 50,005.17 1,096.65 -21,482.93

10 Government 103,993.24 19,493.87 -15,461.11 -77,645.54

11 Bank 307,032.24 260,686.92 348,808.59 -46,582.40

12 Others 9,774.29 -431,871.87 65,384.08 84,047.48

13 Net errors & omissions 19,630.25 171,811.71 344,640.05 108,377.76

14 Balance of payments 986,625.62 824,600.18 811,848.77 586,418.54

Source:Bank of Thailand

US Goods and services trade with Brazil, India and China ( US $ millions) (p. 94)

CHINA INDIA BRAZILUS Goods exports to 65073 17516 24497 Goods import from -321685 -24102 -25650Balance on Goods -256,612 -6,586 -1,153 US Service Exports to 14205 9506 9924 Services imports from -8791 -9663 -4051 US Balance on services 5,414 -157 5,873 US Balance on Goods and services -251,198 -6,743 4,720

©2011 Pearson Education, Inc. publishing as Prentice Hall

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Purchasing Power Parity(PPP)• Purchasing power parity

(PPP) is a theory of long-term equilibrium exchange rates based on relative price levels of two countries.

• The concept is founded on the law of one price, the idea that in absence of transaction costs and official barriers to trade, identical goods will have the same price in different markets when the prices are expressed in terms of one currency.


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Purchasing Power Parity(PPP)• A country’s currency is overvalued if the Big Mac

price (Converted to dollars) is higher than in the US.

• A country’s currency is undervalued if the converted Big Price is lower than the US price.


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Managing Exchange rate Exposure

• Hedging– Forward &

Future Markets

– Options• Call• Put


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Hedging

• Hedging exchange rate exposure involves establishing an offsetting currency position such that the loss or gain of one currency position is offset by a corresponding gain or loss in some other currency.


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Forwards

• With a forward contract, the company can lock in a specific fixed exchange rate for a future date and thus immunize itself from the loss ( or gain) caused by the exchange rate fluctuation.

In addition to spot prices, 30-, 60- and 180 day forward prices are traded for dozens of world currencies.


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Put Options

• Gives the buyer the right,(not obligation) to sell a specified number of foreign currency units at a fixed price until the options expiration date.


Call Options

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Gives the buyer the right,(not obligation) to buy a specified number of foreign currency units at a fixed price until the options expiration date.

14

Global Marketing

Chapter 3

Regional Market

Characteristics and

Preferential Trade

Agreements


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Introduction

• This chapter looks at:– Global trade

organizations– Four types of

agreements– Individual

countries and their preferential trade agreements


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• Many countries seek to lower barriers to trade within their regions

• PTAs give partners special treatment and may discriminate against others

• Over 150 PTAs have been notified to the WTO

• ASEAN- PR CHINA PTA (2005)

• Thailand- Laos (1991)

Preferential Trade Agreements


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Free Trade Area• Two or more countries agree to

abolish tariffs and other barriers to trade amongst themselves.

• Countries continue independent trade policies with countries outside agreement.

• Rules of origin requirements restrict transshipment of goods from the country with the lowest tariff to another.

• (ACFTA), in effect as of 1 January 2010

• (AIFTA), in effect as of 1 January 2010

NAFTA Protest in Ottawa


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North America—NAFTA

• Canada, United States, Mexico

• NAFTA established free trade area–All three nations pledge to promote economic growth through tariff reductions and expanded trade and investment

–No common external tariffs

–Restrictions on labor and other movements remain

U.S.-Mexico Border Crossing


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NAFTA Income and Population


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Asia-Pacific: The Association of Southeast Asian Nations (ASEAN)

• Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam

• Trading partners U.S., EU, China• Geographically close; historically

divided• “ASEAN plus six” (Japan, China,

Korea, Australia, New Zealand, India) working towards an economic community


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ASEAN


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Singapore• World’s 2nd

largest container port

• 2nd highest standard of living in the region behind Japan

• 4.2 million people• 93% literacy rate• Over 3,000

companies• Crime is nearly

nonexistent


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Customs Union• Evolution of Free Trade Area• Includes the elimination of internal

barriers to trade (as in FTA)• AND establishes common external

barriers to trade• Examples: The EU and Turkey, the

Andean Community, etc.


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Common Market• Includes the elimination of internal barriers

to trade (as in free trade area)• AND establishes common external barriers

to trade (as in customs union)• AND allows for the free movement of factors

of production, such as labor, capital, and information

• Mercosur is an example• Mercosur member countries -Brazil, Argentina, Venezuela,

Paraguay and Uruguay.


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Economic Union

• Includes the elimination of internal barriers to trade (as in free trade area)

• AND establishes common external barriers to trade (as in customs union)

• AND allows for the free movement of factors of production, such as labor, capital, and information (as in common market)

• AND coordinates and harmonizes economic and social policy within the union


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Economic Union

• Full evolution of economic union– creation of unified central bank– use of single currency– common policies on issues such as

agriculture, social policy, transport, competition, mergers, taxation

– requires extensive political unity– would lead to a central government in

time

European Union Flag


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European Union

• 27 countries• 491 million

people• Combined GNI of $14.7 trillion• Euro currency,

1999• Harmonization of

laws and regulations


Economic integration stages (World)

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U.S. Goods Exports in 2008


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U.S. Goods Imports in 2008


Assignment -3

Topic for self study: Diffusion Theory in Chapter 4

Read the above topic in chapter 4 and collect more information related to the topic if possible and prepare the assignment and PowerPoint.

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Looking Ahead to Chapter 4

• Social and Cultural Environments

international finance: an overview

Documents

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us price

imports of goods

balance of paymentsbalance

balance of payments986

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