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IMH 10.03 Understand the components of balance of payments. Essential questions: What is balance of payment & how is it calculated? What are the two types of International banks and how do they compare to each other. Terms. inflation balance of payments export-import bank central bank. - PowerPoint PPT Presentation
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IMH 10.03Understand the components of balance of
payments
Essential questions:What is balance of payment &
how is it calculated?What are the two types of
International banks and how do they compare to each other.
Terms inflation balance of payments export-import bank central bank
Introduction: based on the video excerpt what can you tell about “balance of payments”
Video: balance of payments
What is Balance of Payment? While doing business with other countries, currency flows
into and out of a country according to the supply and demand in the market.
These payment flows are measured in a Balance of Payment “BOP”.
If the amount of currency flowing into a country is MORE than the currency flowing out than the country has positive BOP
If the currency flowing into a country is LESS than the currency flowing out, than the country has negative BOP.
A country’s BOP indicates economic activity and global competitiveness.
Inflation and BOP inflation http://www.youtube.com/watch?v=HeOQj97ueqs not inflation
the increase in the overall prices in an economy. Inflation country’s currency loses strength cost of
imported products increases as cost of exports decrease negative impact on currency exchange rate.
Deflation country’s currency gains strength imported products become cheaper as cost of exports increase positive impact on currency exchange rate
hyperinflation extreme case of inflation
A country’s BOP also helps track inflationhttp://www.youtube.com/watch?v=afEqMX9YGCY
Two major components of balance of payments
1. Current accounts: track the flow of currency from trade into and out of a country within a one-year time frame: goods (tangible products) services (intangible products) income (from exports) transfers (As currency flows out due to
imports)
2. . Financial and capital accounts : include loans and investments of a country
Trade deficit and trade surplusA country runs a trade deficit or trade surplus
when the current account does not balance:Trade deficit: country imports more than it
exports(more money leaves than comes in)
http://video.foxbusiness.com/v/3023354280001/midday-market-report-1714/#
sp=show-clips US deficitTrade surplus: country exports more than it
imports(more money comes in than leaves)
http://www.bloomberg.com/video/china-trade-surplus-data-positive-surprise-yao-AzOI3k2iSu6WRCuCd92MFw.html China
>> IMH 10.03 ActivityInterpret the example of the current account statement indicating the BOP of USA. Research the numbers for one of the below countries and prepare a similar statement showing the Balance of payment of that country for any recent year.China SpainBrazil Russia Germany AustraliaCanada ItalyIndia JapanSummarize your findings in 7 to 10 bullet points. List your sources of information at the bottom of the page.
Example of BOP
Role of international banking
Issue letters of creditHelp finance (provide loans for) international
tradeAccept deposits
International banking Types of banks that facilitate trade and impact the BOPs:Export-import bank:(ex-im) banks Independent banks established by governments to finance or
insure the export sales of a country’s products. Reduces risk for importers If exporter loses sales due to political actions, bank will
reimburse
Central bank: the government’s bank responsible for a country’s monetary policy sets interest rates and lends money to a country’s banks finances government debt by selling bonds Example: any federal reserve banks of USA.
Impact of national debt on exchange ratesMoney borrowed from other countries
impacts exchange rates:Stable countries become a safe haven for
international investorsStrong economy suggests low riskIf investors demand more currency (purchase
bonds) from a stable economy a favorable exchange rate is created
If economy is weak investors will not want to purchase bonds, and interest rates go up, weakening the exchange rate
IMH 10.03 Research Activity
http://www.bis.org/cbanks.htmhttp://www.exim.gov/
Use the above two resources to compare the Ex-im banks of USA to Central banks of USA when it comes to international trade.
Prepare a Venn diagram to show the results of your research with 10 facts in each category.