M04-EITE1342-12E-IM-C04

Chapter4TheBalanceofPaymentsQuestions4-1.BalanceofPaymentsDefined.Themeasurementofallinternationaleconomictransactionsbetweentheresidentsofacountryandforeignresidentsiscalledthebalanceofpayments(BOP).Whatinstitutionprovidestheprimarysourceofsimilarstatisticsforbalanceofpaymentsandeconomicperformanceworldwide?TheprimarysourceofsimilarstatisticsforbalanceofpaymentsandeconomicperformanceworldwideistheInternationalMonetaryFund,BalanceofPaymentsStatistics.4-2.ImportanceofBOP.BusinessmanagersandinvestorsneedBOPdatatoanticipatechangesinhostcountryeconomicpoliciesthatmightbedrivenbyBOPevents.Fromtheperspectiveofbusinessmanagersandinvestorslistthreespecificsignalsthatacountry’sBOPdatacanprovide.TheBOPisanimportantindicatorofpressureonacountry’sforeignexchangerate,andthusonthepotentialforafirmtradingwithorinvestinginthatcountrytoexperienceforeignexchangegainsorlosses.ChangesintheBOPmaypredicttheimpositionorremovalofforeignexchangecontrols.Changesinacountry’sBOPmaysignaltheimpositionorremovalofcontrolsoverpaymentofdividendsandinterest,licensefees,royaltyfees,orothercashdisbursementstoforeignfirmsorinvestors.TheBOPhelpstoforecastacountry’smarketpotential,especiallyintheshortrun.Acountryexperiencingaserioustradedeficitisnotlikelytoexpandimportsasitwouldifrunningasurplus.Itmay,however,welcomeinvestmentsthatincreaseitsexports.4-3.EconomicActivity.Whatarethetwomaintypesofeconomicactivitymeasuredbyacountry’sBOP?Currenttransactionshavingcashflowscompletedwithinoneyear,suchasfortheimportorexportofgoodsandservices.Capitalandfinancialtransactions,inwhichinvestorsacquireownershipofaforeignasset,suchasacompany,oraportfolioinvestment,suchasbondsorsharesofcommonstock.4-4.Balance.WhydoestheBOPalways“balance”?Thealgebraicsumofallflowsaccountedforinthecurrentaccountandthecapitalandfinancialaccountsshould,intheory,equalchangesinacountry’smonetaryreserves.Becausedataforthebalanceofpaymentsiscollectedonasingleentrybasisandsomedataismissed,theequalizationusuallydoesnotoccur.Theimbalanceispluggedbyanentrycalled“errorsandomissions,”whichmakestheaccountsbalance.18Eiteman/Stonehill/Moffett•MultinationalBusinessFinance,TwelfthEdition4-5.BOPAccounting.IftheBOPwereviewedasanaccountingstatement,woulditbeabalancesheetofthecountry’swealth,anincomestatementofthecountry’searnings,orafundsflowstatementofmoneyintoandoutofthecountry?Acountry’sbalanceofpaymentsissimilartoacorporation’sfundsstatementinthatthebalanceofpaymentsrecordseventsthatcausethereceipt(earnings)anddisbursement(expenditures)offoreignexchange.4-6.CurrentAccount.Whatarethemaincomponentaccountsofthecurrentaccount?GiveonedebitandonecreditexampleforeachcomponentaccountfortheUnitedStates.Themaincomponentsandpossibleexamplesare:Tradeingoods:Debit:U.S.firmpurchasesGermanmachinetools.Credit:SingaporeAirLinesbuysaBoeingjet.Tradeinservices:Debit:AnAmericantakesacruiseonaDutchcruiseline.Credit:TheBraziliantouristagencyplacesanadinTheNewYorkTimes.Incomepaymentsandreceipts:Debit:TheU.S.subsidiaryofaTaiwancomputermanufacturerpaysdividendstoitsparent.Credit:ABritishcompanypaysthesalaryofitsexecutivestationedinNewYork.Unilateralcurrenttransactions:Debit:TheU.S.-basedInternationalRescueCommitteepaysforanAmericanworkingontheAfghanborder.Credit:ASpanishcompanypaystuitionforanemployeetostudyforanMBAintheUnitedStates.4-7.RealversusFinancialAssets.Whatisthedifferencebetweena“real”assetanda“financial”asset?Realassetsaregoods(merchandise)andusefulservices.Financialassetsarefinancialclaims,suchassharesofstockorbonds.4-8.DirectversusPortfolioInvestments.Whatisthedifferencebetweenadirectforeigninvestmentandaportfolioforeigninvestment?Giveanexampleofeach.Whichtypeofinvestmentisamultinationalindustrialcompanymorelikelytomake?Adirectinvestmentismadewiththeintentthattheinvestorwillhaveadegreeofcontrolovertheassetacquired.Typicalexamplesarethebuildingofafactoryinaforeigncountrybythesubsidiaryofamultinationalenterpriseortheacquisitionofmorethan10%ofthevotingsharesofaforeigncorporation.Aportfolioinvestmentisthepurchaseoflessthan10%ofthevotingsharesofaforeigncorporationorthepurchaseofdebtinstruments.Multinationalenterprisesaremorelikelytoengageindirectforeigninvestmentthaninportfolioinvestment.Chapter4TheBalanceofPayments194-9.CapitalandFinancialAccounts.Whatarethemaincomponentsofthefinancialaccounts?GiveonedebitandonecreditexampleforeachcomponentaccountfortheUnitedStates.Themaincomponentsandpossibleexamplesare:Directinvestment:Debit:FordMotorCompanybuildsafactoryinAustralia.Credit:FordMotorCompanysellsitsfactoryinBritaintoBritishinvestors.Portfolioinvestment:Debit:AnAmericanbuyssharesofstockofaEuropeanfoodchainontheFrankfurtStockExchange.Credit:ThegovernmentofKoreabuysU.S.treasurybillstoholdaspartofitsforeignexchangereserves.Otherinvestment:Debit:AU.S.firmdeposits$1millioninabankbalanceinLondon.Credit:AU.S.firmgeneratesanaccountreceivableforexportstoCanada.4-10.ClassifyingTransactions.Classifythefollowingasatransactionreportedinasub-componentofthecurrentaccountorthecapitalandfinancialaccountsofthetwocountriesinvo