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Learning Objectives
To understand the fundamental principles of how countries measure international business activity, the balance of payments To examine the similarities of the current and capital accounts of the balance of payments To understand the critical differences between trade in merchandise and services and why international investment activity has recently been controversial in the United States To review the mechanical steps of how exchange rates are transmitted into altered trade prices and eventually trade volumes To understand how countries with different government policies toward international trade and investments, or different levels of economic development, differ in their balance of payments
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Introduction
The measurement of all international economic transactions between the residents of a country and foreign residents is called the balance of payments (BOP) The two major sub accounts of the balance of payments are: Current account Capital account
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Three main elements to the process of measuring international economic activity include:
Identifying what is and is not an international economic transaction Understanding how the flow of goods, services, assets, and money creates debits and credits to the overall BOP Understanding the bookkeeping procedures for BOP accounting
The most encouraging news for U.S. manufacturing trade is the growth of exports in recent years
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The contents of this account are for all intents and purposes the same as those of the Capital Account under IMFs BOP accounting framework used prior to 1996
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Portfolio Investment
This is the net balance of capital that flows in and out of the U.S., but does not reach the 10% ownership threshold of direct investment It is capital invested in activities that are purely profit-motivated rather than ones made in the prospect of controlling or managing the investment These have shown much more volatile behavior than net direct investments over the past decade
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Capital Mobility
The degree to which capital moves freely cross-border is critical to a country s balance of payments The ability of capital to move involves economic and political factors Obstfeld and Taylor (2001) studied the globalization of capital markets and argued the post-1860 era can be subdivided into four distinct periods
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Capital Flight
Capital flight is the sudden and shocking outflow of capital from a nation s economy in which it is perceived there is political, economic, or currency crises forthcoming Five primary mechanisms exist by which capital may be moved from one country to another
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