International Financial Management

Abridged 10th Edition

by Jeff Madura

2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

2
International Flow of Funds
Chapter Objectives
This chapter will:
A. Explain the key components of the balance of payment
B. Explain how international trade flows are influenced by economic
factors and other factors
C. Explain how international capital flows are influenced by country
characteristics

2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Balance of Payments
1. Summary of transactions between domestic and
foreign residents for a specific country over a
specified period of time.
a. Current Account: summary of flow of funds due to purchases
of goods or services or the provision of income on financial
assets.
b. Capital Account: summary of flow of funds resulting from
the sale of assets between one specified country and all other
countries over a specified period of time.

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Current Account
1. Payments for merchandise and services
2. Factor income payments
3. Transfer payments

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Current Account
Payments for merchandise and services
Merchandise exports and imports represent tangible products,
such as computers and clothing, that are transported between
countries.
Service exports and imports represent tourism and other
services, such as legal, insurance, and consulting services,
provided for customers based in other countries.
The difference between total exports and imports is referred to
as the balance of trade.
Deficit/ Surplus Balance of Trade.
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Current Account

Factor Income Payments

It represents income (interest and dividend payments)
received by investors on foreign investments in financial
assets (securities).
Transfer Payments
A third component of the current account is transfer
payments, which represent aid, grants, and gifts from one
country to another.

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Capital and Financial Accounts

1.
2.
3.
4.

Direct foreign investment

Portfolio investment
Other capital investment
Errors and omissions

2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Capital and Financial Accounts

Direct Foreign Investment
It represents the investment in fixed assets in foreign
countries that can be used to conduct business operations.
Portfolio Investment
It represents transactions involving long-term financial
assets (such as stocks and bonds) between countries that
do not affect the transfer of control.
Other Capital Investment
It consists of other capital investment, which represents
transactions involving short-term financial assets (such as
money market securities) between countries.
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Factors Affecting International Trade Flows

1. Cost of Labor : current account increase if cost of labor
decrease relative to trade partners.
2. Inflation: current account decreases if inflation increases
relative to trade partners.
3. National Income: current account decreases if national
income increases relative to other countries.
4. Government Policies
a. Subsidies for exporters
b. Restrictions on imports
c. Lack of restriction on piracy

5. Exchange Rates: current account decreases if currency

appreciates relative to other currencies. Malibu Vs Acce
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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Agencies that Facilitate International Flows

1.
2.
3.
4.
5.
6.
7.

International Monetary Fund (IMF)

World Bank
World Trade Organization (WTO)
International Financial Corporation (IFC)
International Development Association (IDA)
Bank for International Settlements (BIS)
Organization for Economic Cooperation and
Development (OECD)
8. Regional development agencies
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2011, 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.