IMH 10.03 Understand the components of balance of payments

1. 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.

2. Terms • inflation • balance of payments • export-import bank • central bank

3. Introduction: based on the video excerpt what can you tell about “balance of payments” • Video: balance of payments

4. 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.

5. 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 inflation • http://www.youtube.com/watch?v=afEqMX9YGCY

6. 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

7. Trade deficit and trade surplus • A 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 deficit • Trade 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

8. >>IMH 10.03 Activity Interpret 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 Spain Brazil Russia Germany Australia Canada Italy India Japan Summarize your findings in 7 to 10 bullet points. List your sources of information at the bottom of the page.

9. Example of BOP

10. Role of international banking • Issue letters of credit • Help finance (provide loans for) international trade • Accept deposits

11. 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.

12. Impact of national debt on exchange rates • Money borrowed from other countries impacts exchange rates: • Stable countries become a safe haven for international investors • Strong economy suggests low risk • If 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

13. 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.