FDI 4

23 flashcards · Other · by Daniel F.

1. Balance of payments accounts

   country’s international transactions are recorded in the BOP Accounts Current account (CA): trade in goods and services, income transfers Financial account (FA): foreign investment Official reserves account (OR): central bank transactions

2. Balance of payments identity

   CA + FA + OR = 0 each transaction is recorded 2x Credit items (+) money flowing into the country demand for domestic currency -> foreign country needs domestic currency to pay Debit item (-) money leaving the country demand for foreign currency -> domestic country needs foreign currency to pay

3. Current Account (CA)

   Principle trade in goods trade in services factor income payments unilateral transfers Accounting exports + imports - transfers from abroad + transfers to abroad -

4. Financial Account (FA)

   Principle Foreign direct investment Portfolio investment Other foreign investment Accounting Selling foreign assets (+) Buying foreign assets (-) Foreign buying domestic assets (+) Foreigners selling domestic assets (-)

5. Official Reserves Account (OR)

   indicates change in foreign reserve assets OR is (-) -> stock increased OR is (+) -> stock decreased Principle Foreign currency transactions Accounting Buying domestic currency (+) Selling foreign currency (+) Selling domestic currency (-) Buying foreign currency (-)

6. Lender vs borrower

   net foreign investment = CA surplus -> country is net lender flow of money in is greater than flow of money out deficit -> country is net borrower flow of money out is greater than flow of money in If=S–Id=CAI_f = S – I_d = CAIf​=S–Id​=CA Foreign investment = Savings - Domestic investment

7. creditor vs debtor

   Foreign assets (indicated by OR) (+) -> creditor (-) -> debtor

8. Official Settlement Balance (B)

   Balance of current account and financial account CA + FA B > 0 -> OR < 0 -> Official reserve asset holdings of country have increased or foreign official holdings of country’s assets have fallen. B < 0 -> OR > 0 -> official reserve asset holdings of country have fallen or foreign official holdings of country’s assets have increased.

9. Nominal exchange rate

   price of one currency in terms of another (relative value of two currencies)

10. Changes in the exchange

    one currency gains value relative to the other one (appreciation/depreciation)

11. appreciation/depreciation in term of HCU/FCU e.g 0.89 Eur/$ -> 0.92 EUR/$

    Rise -> appreciation of the foreign currency and a depreciation of the home currency e.g. we have to pay more eur for 1 dollar appreciation of the $, depreciation of the EUR

12. Effective exchange rate

    overall value of countries currency weighted average of the values of a country’s currency relative to various (major) currencies

13. Spot rate vs forward rate

    Spot rate - price of buying or selling a currency at this moment Forward rate - price of buying or selling a currency at a specific date in the future Spot rate > forward rate: Foreign currency is cheaper in the future than Foreign currency is selling at a forward discount Spot rate < forward rate: Foreign currency is more expensive in the future than today Foreign currency is selling at a forward premium.

14. Nominal exchange rate vs real exchange rate

    Nominal exchange rate (e) = the relative value of two currencies Real exchange rate (ε) = the relative value of two currencies adjusted for differences in prices in the two countries. Movements in the real exchange rate indicate changes in the international price competitiveness of a country’s products. e > 1: foreign products are more expensive than domestic products (e.g. e = 1.3 foreign products are 30% more expensive) e < 1: foreign products are cheaper than domestic products (e.g. e = 0.8…

15. increase in ε means

    Foreign prices have increased relative to domestic prices The foreign currency has become more expensive -> Implies that the home country's products have become more competitive compared to the foreign country's products.

16. Exchange rate movements

    increase in the supply of a currency reduces its value (depreciation) increase in demand for a currency increases its value (appreciation)

17. Exports of products or capital imports create

    demand for the domestic currency and supply of foreign currency the domestic currency appreciates (e↓)

18. Imports of goods from abroad or capital export create

    demand for the foreign currency and supply of domestic currency the domestic currency depreciates (e↑)

19. exchange rate systems

    Floating (flexible) exchange rates Fixed exchange rates

20. flexible exchange rate regime

    relative value of a currency is market-driven (supply & demand)

21. fixed exchange rate regime

    central bank determines a target rate and a band around it buying and selling domestic and foreign currency, the central bank can keep the exchange rate fixed

22. Arbitrage in the exchange market

    by buying a currency where it is cheap and selling it where it is expensive -> changes the demand and supply of the currencies and will make the two exchange rates converge

23. purchasing power parity

    the exchange rate between two currencies should adjust to reflect changes in the relative inflation rates of the two countries. In other words, if one country experiences higher inflation than another, its currency should depreciate relative to the other country’s currency