226 Module 8 The International Monetary System and Financial Forces more globalized. In the 13 countries shown, the average interest rate was 3.5 percent. The corresponding figure in 1993 was 6.9 percent. Finally, inflation rates cause the cost of the goods and services produced in a country to rise, and thus the goods and services become less competitive globally. Producers in the high-inflation country find export sales more difficult. Such conditions may lead to balance-of-payments deficits in the trade account, where a nation’s international transactions are recorded, so under these conditions management must be alert to government policy changes that attempt to correct the deficits, such as more restrictive fiscal or monetary policies, currency controls, export incentives, and import obstacles. Because monitoring balance of-payment accounts is important, we now take a look at the balance of payments. Study Smart and Improve Your Grades Go to http://bit.ly/SmartBookNOW LO 8-5 Explain the significance of the balance of payments to international business decisions. Balance of Payments The balance of payments (BOP) is a record of a country’s transactions with the rest of the world. So it actually tracks the flows of capital in and out of the country. BOP data are of interest to international businesspeople for several reasons. First, a country’s balance of payments reveals the demand for the country’s currency. If a country is exporting more than it imports, there will be a high demand for its currency in other countries, so its customers can pay for the exported goods. This demand may well create pressure on the exporter’s currency, in which case it might be expected to strengthen. Conversely, when a country imports more than it exports, its currency might be expected to weaken, or, if it is not a floating currency, to be devalued, that is, its value reduced by the government. Faced with such a trade deficit, as occurs when a country’s citizens import more than they export, a government might lean toward restrictive monetary or fiscal policies. For example, it could introduce currency or trade controls. The BOP trend also helps managers predict what sort of changes in the economic environment might develop in the country. This prediction could affect their choice of strategic risks to take in a specific country. So international managers use BOP data when they build their anticipations about the future economic environment. Might currency controls be introduced? Might a devaluation be coming? Is the interest rate likely to move? BOP Accounts The BOP accounts are recorded in double-entry bookkeeping form. Each international transaction is an exchange of assets with a debit and a credit side. Payments to other countries, which are funds flowing out, are tracked as debits (2), while transactions that are payments from other countries, which are funds flowing in, are tracked as credits (1). The statement of a country’s BOP is divided into several accounts and many subaccounts, as outlined in Figure 8.3. Deficits and Surpluses in BOP Accounts The BOP current account and capital account add up to the total account. A deficit in the current account is always accompanied by an equal surplus in the capital account, and vice versa. Let’s see how this works. If you purchase a case of French wine in the United States for $200, your payment, as it heads out of the United States and to the French winery, will be recorded as a debit in the U.S. current account. Once the winery receives your dollars, it has to do something with them. If the treasurer of the winery decides to deposit your payment in a dollar account at a U.S. bank, the amount will show up as a credit in the U.S. capital account. If the winery exchanges your dollar payment for euros, then the bank receiving the dollars will have to make a decision about how to spend or invest them. Sooner or later, these dollars will show up as a credit on the U.S. account. balance of payments (BOP) Record of a country’s transactions with the rest of the world
Geringer_InternationalBusiness
To see the actual publication please follow the link above