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Flashcards in BOP / FDI Deck (17)
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1

BOP

Balance of Payments:
accounts for countrys international transactions for a calendar year

includes:
-current account
--> merchandise and services trade
-financial account
--> resulting financial flows between nations

2

BOP Accounting

Double entry system: Each positive (+) transaction has a balancing negative (-) transaction:

Positive Transaction current account (You receive money):
-Merchandise Export
-Service Export
-Income received through foreign investments etc

Negative Transactions current account (You spend money in foreign country)
-Merchandise Import
-Service Import
-FDI etc.

3

US current account deficit

600 billion $

4

Current account surplus/deficit

surplus: exports exceeds imports
deficit: import exceed exports

5

Why surplus in long term not sustainable?

- problem of getting too rich
- value of currency will go up
--> higher exchange rate
--> limits nations ability to sustain exports bc imports for other countries are very expensive
--> imports become less expensive

6

Why deficit in long term not sustainable?

3 options when in deficit:
- finance (take dept)
-utilize savings
-sell overseas assets

--> nation has to reserve money to pay back dept
-->lower investments bc of slow economic growth and higher interest rates
-->value of currency decreases and imports will get more expensive

7

Trade deficit or surplus is worse?

Trade deficit:
- value of currency goes down
-worse competition in global market
-dept goes up; financial dependent

8

Why can the US sustain trade deficit

- US $ central currency in the world,--> dollar value stays high
- US government never defaulted on its dept, other countries want to buy the US dept
- other countries want to sponsor the US dept because they do not want to loose such big market

9

What happened to trade deficit in 2008-2009 (trade deficit cut in half)? see chart in slide

- global economy recession, less imports in the US, less consuming behaviour of US citizen
- it did not go back to where it was because of decreased oil prices; decreased imports in the US

10

components of current account

-goods (main driver of deficit)
-services
-primary income (foreign earnings-domestic earnings)
-secondary income (gifts aids)

11

FDI

Foreign direct investment
Conditions:
- 10% or more ownership
-for at least one year
-with intention to control

12

Whats non managerial involvment?

portfolio investment

13

Forms of FDI

-New Investment Greenfield
-joint ventures
-Mergers&Aquisitions:
--> quick entry, local market know how, eliminate competitor, buying problems

14

Horizontal/vertical FDI

Horizontal:
-same industry as the firm operates at home
Vertical:
forward: investment closer to the customer
backward: investment closer to the initial materials

15

FDI Pros & Cons

-circumvents trade barriers
-keep up with competiton
-be closer to customer
-lobby work
but FDI is expensive and risky compared to just export

16

Host country effect bc of FDI

- access to new products
-economical growth
-employment
-ressource transfer

17

Home country effect

-adverse BOP current account effects
-positive employment effect
-economical grwoth
cost:
-BOP trade negativley effected
- loss of employment to overseas market