15 pages
Word Count
1287 words
Course Code


January 9, 2021
Session 2: Balance of Payments
Global Financial Management
Meng Gao
School of Business, University of Connecticut
When firms undertake FDI,
A) they become MNCs.
B) they reduce their tax rate since they can tell each country that
they do business in that they paid their taxes in other countries.
C) they can exploit workers by paying them below-market wages
in depreciating currencies.
D) all of the options
FDI can take the form of
A) Greenfield investment.
B) cross-border M &A.
C) establishing new production facilities in a foreign country.
D) all of the options
Balance of Payments Accounting
The Current Account
The Capital Account
The Financial Account
Statistical Discrepancy
Official Reserves Account
The Balance of Payments Identity
Balance of Payments and the Exchange Rate
From financial to real markets
A basic idea: Exchange rates must adjust to equate
supply and demand of currencies in the forex market
A proxy for demand and supply of currency?
Balance of Payments (BOP) accounting records
international trade and capital flows
a simple accounting tool, similar to balance
sheets of companies
It summarizes exactly how the domestic economy
interacts with the rest of the world
The exchange rate are fundamentally driven by
changes in the balance of payments.
Balance of Payments (BOP)
and exchange rates
Who pays attention to BOP?
Business owners, politicians, economists, and anyone
affected by interest rates, exchange rates, or the stock and
bond markets
Why do they care?
BOP figures affect currency values, interest rates,
government policy, trade, fiscal & monetary policies
Volume and volatility of stocks, bonds, & currencies are
significantly higher on days when BOP data are released
BOP data are among the few tools that work for explaining
currency crises
Balance of Payments Accounting
the statistical record of a country’s international
transactions over a certain period of time
presented in the form of double-entry
Balance of Payments Accounts
The Current Account
The Capital Account
The Financial Account
Statistical Discrepancy
Official Reserves Account
Copyright © 2021 by the McGraw-Hill Companies, Inc.
All rights reserved. 3-7
Main Categories in the US Balance of Payments
Balance of Payments Example 1
Suppose that Maplewood Bicycle in Maplewood,
Missouri, USA imports $100,000 worth of bicycle frames
from Mercian Bicycles in Darby, England.
Maplewood Bicycle makes payment by transferring the
funds to a New York bank account kept by Mercian
We are going to study how these transactions, at the