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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
Overview
• 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
3-3
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
