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Unit 2 IFM

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12 views28 pages

Unit 2 IFM

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boburovich122
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Unit 2

International Flow of Funds


Flow of Funds

• The flow of Funds is the


movement of money in
and out of bank accounts.
Balance of Payments

• The balance of payments is a measurement of all transactions between


domestic and foreign residents over a specified period of time.

• Each transaction is recorded as both a credit and a debit, i.e. double –


entry book keeping.

The transactions are presented in three groups

 Current account

Capital account

Financial account
Balance of Trade components
Current Account Financial Account

• Merchandise trade • Financial assets abroad


• Services
• Foreign-owned financial assets
• Income receipts

• Unilateral transfers

Capital account
• Capital transfers

• Sales and purchase of non produced, non


financial assets
Current Account

• This account scans all the incoming and outgoing of goods and
services between countries.

• All the payments made for raw materials and constructed goods
are covered under this account.
Capital account

• Capital transactions like purchase and sale of assets (non-financial)


like lands and properties are monitored under this account.

• This account also records the flow of taxes, acquisition, and sale of
fixed assets by immigrants moving into the different country.
Finance account

• The funds that flow to and from the other countries through
investments like real estate, foreign direct investments, business
enterprises, etc., is recorded in this account.
International trade flow

International trade flow refers to the exchange


of goods and services between countries. This
exchange involves two main components

• Exports: Goods and services produced in


one country and sold to another.

• Imports: Goods and services purchased


from another country for consumption or
use within the domestic country.
There are several factors that influence international trade flows,
including:

• Comparative Advantage: A country's ability to produce a good or


service more efficiently than another country.

• This incentivizes trade, as countries tend to export goods they have a


comparative advantage in.
Supply and Demand

• International trade allows countries to fulfill domestic demand for


goods and services that they cannot produce efficiently or don't have
access to domestically.

• Trade Policies: Government regulations such as tariffs, quotas, and


trade agreements can affect the flow of imports and exports.
Factors affecting International trade flow
Cost of Labor: Firms in countries where labor costs are low commonly have
an advantage when competing globally, especially in labor-intensive
industries.

Inflation: Inflation is a sustained increase in the general price level of goods


and services in an economy over a period of time.

• When the price level rises, each unit of currency buys fewer goods and
services.

• Consequently, inflation reflects a reduction in the purchasing power per unit


of money.
National Income: If a country’s income level (national income) increases
by a higher percentage than those of other countries, its current account is
expected to decrease.
• As the real income level (adjusted for inflation) rises reflects an
increased demand for foreign goods.
Government Policies: A country’s government can have a major effect on
its balance of trade due to its policies on subsidizing exporters, restrictions
on imports, or lack of enforcement on piracy.
Foreign Currency Reserves: To compete effectively in international markets, a
nation must have access to imported machinery that enhances productivity, which
may be difficult if forex reserves are inadequate.
Exchange Rates: The exchange rate is the price of one currency in terms of
another.
• Exchange rates fluctuate depending on the demand for a particular currency.
• If there is a high demand for a country’s currency then its price will tend to
rise. Because currencies fluctuate in price it can often be cheaper to buy goods
in one country and sell them in another.
• Exchange rates consequently have a significant effect on global trade.
Competitiveness: Competitiveness is a measure of the relative ability
of different countries to provide different products or services.
• Competitiveness takes into account the efficiency, costs of
employment, level of government regulation, and ease of doing
business.
• Competitiveness affects international trade because the more
competitive countries will tend to attain a higher level of global
trade.
Agencies that facilitate international flows

• International Monetary fund

• IBRD: International Bank for Reconstruction and Development

• IDA: International Development Association

• IFC: International Finance Corporation

• MIGA: Multilateral Investment Guarantee Agency

• ICSID: International Centre for Settlement of Investment Disputes

• World Trade Organization (WTO)

• Bank for International Settlements (BIS)


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


Agencies that facilitate international flows

International Monetary fund The IMF 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.
• To promote cooperation among countries on international
monetary issues,

• To promote stability in exchange rates

• To provide temporary funds to member countries attempting


to correct imbalances of international payments

• To promote free mobility of capital funds across countries

• Promote free trade.


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.
Balance of Payments Equilibrium Definition

• Balance of payments equilibrium refers to a


situation where a country's total payments
(outflows) are equal to its total receipts
(inflows) in the payments account.

• Total exports = Total imports

• Total debit flows = Total credit flows

• Total outward payments = Total inward


payments
Balance of Payments Disequilibrium Definition

• Disequilibrium in balance of payments


refers to an imbalance where a
country's total payments do not equal
its total receipts.

There are two types of disequilibrium.


Balance of payments deficit - When a country's total payments
exceed its total receipts. This means more money is flowing out
of the country than coming in.

Balance of payments surplus - When a country's total receipts


exceed its total payments. Extra money is coming into the
country than going out.
Reasons for Balance of payments deficit-

This occurs when a country's total payments exceed its total receipts.

A BOP deficit can occur due to the following.

• Higher imports than exports, leading to a trade deficit.

• More outward investment and loan repayments than inward investment and
loans.

• Higher interest payments on foreign debt.

• More tourism spending abroad by residents than spending by foreign


tourists in the country.
Capital account convertibility

• Capital account convertibility refers to


the freedom of individuals,
businesses, and governments to move
capital in and out of a country's
borders in the form of investments,
loans, and other financial assets.
• It signifies the ability to freely exchange local currency for
foreign currency and vice versa for investment purposes
without significant restrictions or controls imposed by the
government or central bank.
Key points regarding capital account convertibility:

Market Determination:

• Under capital account convertibility, exchange rates are typically


determined by market forces of supply and demand, rather than
being fixed or heavily regulated by the government.

Freedom of Movement:

• Individuals, corporations, and financial institutions can freely


convert their local currency into foreign currency and invest or
hold assets abroad.
Risk and Benefits:

• Capital account convertibility offers several potential benefits, including


increased liquidity, access to a wider range of investment
opportunities, and enhanced integration with global financial markets.

Macroeconomic Stability:

• Capital account convertibility is often pursued as part of broader economic


reforms aimed at promoting growth, attracting foreign investment, and
enhancing competitiveness.
Globalization:
• In an increasingly globalized world, capital account convertibility is
seen as essential for facilitating cross-border trade, investment, and
financial transactions.
• It allows for efficient allocation of resources and promotes economic
efficiency.

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