Balance of Payments • The system of accounts that records a nation’s international financial transactions is called its balance of payments. • Receipts from other countries (plus side): • Export sales • Money spent by foreign tourists • Foreign investments into your own country • Foreign government payments • Payments to other countries (negative side): • Imports • Spending by your local citizens in overseas • New overseas investments • Cost of economic and military aid
Balance of Payments • Three types of accounts • Current account • Capital account • Reserves account • If a country’s expenditures > income, its citizens must reduce standard of living, or its money will lose value against other countries’. • Deficit= Loss of value for the dollar
Balance of Payments (cont..) • Current Account: A record of all merchandise exports, imports, and services plus unilateral transfer of funds. • Capital Account: A record of direct investment, portfolio investment, and short-term capital movements to and from countries. • Reserve Account: A record of exports and imports of gold, increase or decrease in foreign exchange, and increase or decrease in liabilities to foreign central banks.
Protectionism • Acts to “protect” a country’s markets from foreign competitors • Why? • Infant industry • National defense • Industrialization of underdeveloped countries
Protectionism • Tariff • A tax on imported goods • Quota • A unit or dollar limit placed on a good • Sometimes paired with tariffs • Voluntary Export Restraint: Restriction on the volume of exports. • Boycott: An absolute restriction against the purchase and importation of certain good/service from other countries. • Embargo: Refusal to sell to a specific country.
Protectionism • Monetary Barriers • Blocked currency • Differential exchange rate • Government approval to secure foreign exchange • Standards • Antidumping Penalties
Easing Trade Restrictions • Market access • Allows US to retaliate against protectionism • Export expansion • Easier to gain an export license • Government responsible for exporter needs • Import relief • Offers assistance to companies impacted by imports
Easing Trade Restrictions • General Agreement on Tariffs and Trade • U.S. and 22 other countries • Reduces tariffs • Set up an organization to monitor trade • Resulted in deep cuts of tariffs
Easing Trade Restrictions • World Trade Organization • Began in 1995 • Governs trade • Settles disputes and issues penalties against countries practicing protectionism
Easing Trade Restrictions • International Monetary Fund • Stabilize exchange rates • Lends money to member countries • Special drawing rights • Average base of value to counter fluctuations in world gold values
Easing Trade Restrictions • World Bank Group • Lend money and provide assistance to developing countries • Mediate between investors and foreign governments