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.