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IMH 10.03 Understand 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 hyperinflation 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 extreme case of inflation A country’s BOP also helps track inflation http://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 oneyear 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 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/middaymarket-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-datapositive-surprise-yao-AzOI3k2iSu6WRCuCd92MFw.html China >> 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. Example of BOP Role of international banking Issue letters of credit Help finance (provide loans for) international trade Accept 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 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 IMH 10.03 Research Activity http://www.bis.org/cbanks.htm http://www.exim.gov/ Use the above two resources to compare the Exim 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.