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Chapter1:KeepingUpWithaChangingWorld-TradeFlows,CapitalFlows,andtheBalanceOfPaymentsI.ChapterOverviewThechapterbeginsbydiscussingontheimportanceofinternationaleconomicintegration,citingrecentcurrenteventsthatdemonstratethewidelyvaryingopinionsoftheadvantagesanddisadvantagesofinternationaltradeandfinance.Thechaptersetsthestagetologicallyexaminetheseopinionsandstressestheneedtobeginbyunderstandinghowinternationaltransactionsaremeasured.Thesecondsectionofthechapterdefinesthebroadconceptofglobalizationwhichincludesincreasedmarketintegration,theexpansionofworldgovernance,andtheincreasedmobilityofpeopleandinformation;andthenarrowfocusofeconomicintegration,whichreferstothestrengtheningofexistingandcreationofnewinternationallinkages.Thechapterthenproceedstodistinguishtherealandfinancialsectorsthatlinktheworld'seconomies.Historicaldataarepresentedtogiveasenseofthegrowthofworldtradeandtransactionsinglobalfinancialmarketsduringthepastfewdecades.Inthethirdsectionofthechapter,internationalbalanceofpaymentsaccountingisdescribedintermsofadoubleentrybookkeepingsystem.Thecomponentsofeachofthethreemajoraccounts,(1)thecurrentaccount,(2)theprivatecapitalaccount,and(3)theofficialsettlementsbalance,arediscussedindetail.Theusageofthetermsbalanceofpaymentsdeficitandbalanceofpaymentssurplusareequatedtoapositiveofficialsettlementsbalanceandanegativeofficialsettlementsbalancerespectively,asdistinctfromthetermoverallbalanceofpaymentswhichmustbezerobyconstruction.Thenextsectionprovidesaseriesofconcreteexamplesofinternationaltransactionsandthewaysthattheseimpactthebalanceofpaymentsaccounts.Theexamplesusedare:(1)Theimportationofanautomobile,whichregistersasadebitundercurrentaccountmerchandiseandacreditundercapitalflowsinthecategoryofforeignassetsintheU.S.(2)Theservicesconsumedbyastudentwhotravelsabroad,whichregistersasadebitundercurrentaccountservices,andacreditundercapitalflowsinthecategoryofforeignassetsintheU.S.(3)Thepurchaseofadomestictreasurybillbyaforeignresident,whichregistersasacreditundercapitalflowsasaforeignassetintheU.S.,andasadebitundercapitalflowsasaU.S.assetabroad.(4)ThepaymentofinterestbytheU.S.onaforeign-heldasset,whichregistersasdebitundercurrentaccountincomeandacreditundercapitalinflowsintheforeignassetsintheU.S.category.(5)TheprovisionofhumanitarianaidabroadbyaU.S.charitableorganizationsintheformofadonationofwheat,whichregistersasacreditinthecurrentaccountmerchandisecategory,andadebitintheunilateraltransferscategory.Thenextsectionprovidesadiscussionofwhatitmeansforacountrytobeanetcreditorornetdebtorintermsofcapitalaccountbalances.Thesectionappliesthematerialtoanexaminationofdebtreliefforheavilyindebtedpoorcountries(ahotpoliticaltopicwhichmayprovideagoodopportunityforclassdiscussion).Thefinalsectionofthechapterrelatescurrentaccountbalancestocapitalflows.Itexaminesthisissuebasedsolelyonaccountingidentitiesprovidedearlier.Domesticsavingslessdomesticinvestmentdeterminethecurrentaccountbalanceaswellasnetcapitalflows.Thus,thecurrentaccountbalanceisdirectlyrelatedtonetcapitalflows.II.OutlineA.WhyItIsImportanttoUnderstandInternationalMoneyandFinanceB.InternationalEconomicIntegration:TheImportanceofGlobalTradeandFinancialMarkets1.TheRealandFinancialSectorsofanEconomy2.WorldTradeinGoodsandServices3.InternationalTransactionsinFinancialAssets4.TheMostGlobalizedNationsC.TheBalanceofPayments1.BalanceofPaymentsasaDouble-EntryBookkeepingSystem2.Balance-of-PaymentsAccountsa.TheCurrentAccount1)Goods2)Services3)Incomeb.CapitalAccountc.TheOfficialSettlementsBalance3.DeficitsandSurplusesintheBalanceofPayments4.OtherDeficitandSurplusMeasuresD.ExamplesofInternationalTransactionsandHowtheyAffecttheBalanceofPayments1.Example1:ImportofanAutomobile2.Example2:ACollegeStudentTravelsAbroad3.Example3:AForeignResidentPurchasesaDomesticTreasuryBill4.Example4:TheUnitedStatesPaysInterestonaForeign-HeldAsset5.Example5:ACharitableOrganizationintheUnitedStatesProvidesHumanitarianAidAbroad6.ExampleCombinedE.TheCapitalAccountandtheInternationalFlowofAssets1.Example:ACollegeStudent2.ACapitalAccountSurplus3.TheUnitedStatesasaNetDebtor4.DebtRelieffortheHeavilyIndebtedPoorCountriesF.RelatingtheCurrentAccountBalanceandCapitalFlowsG.ChapterSummaryIII.FundamentalIssues1.Howimportantistheglobalmarketforgoodsandservices?2.Howimportantaretheinternationalmonetaryandfinancialmarkets?3.Whatisacountry'sbalanceofpayments,andwhatdoesthismeasure?4.Whatdoesitmeanforacountrytobeanetdebtorornetcreditor?5.Whatistherelationshipbetweenanation'scurrentaccountbalanceanditscapitalflows?IV.ChapterFeatures1.ManagementNotebook:“WhataretheMostGlobalizedFirms?”Thisnotebookfirstconsidersthelargestmultinationalenterprises(MNEs)intheworldandthenconsiderstheworld’smostglobalizedfirms.ThemeasureofglobalizationthatisusedisthetransnationalityindexoftheUnitedNationsConferenceonTradeandDevelopment(UNCTAD).Thismeasureaveragesthevaluesoftheratiosofforeignsalestototalsales,foreignassetstototalassetsandemployeesabroadtototalemployees.TypicallythemostglobalizedfirmsaretheMNEsofsmalleradvancedeconomies