Basic of international trade and finance, International finance

GOODS AND SERVICES (GIFT MONEY DONE OR RECEIVED FOR FOREIGN SUPPORT TO CITIZENS OF

OTHER POOR OR DEVASTED COUNTRY). 2

CAPITAL AND FINANCIAL ACCOUNT BALANCE

CAPITAL ACCOUNT BALANCE FINANCIAL ACCOUNT BALANCE

- NET CAPITAL ACCOUNT TRANSACTIONS - NET FINANCIAL FLOWS

ASSETS BOUGHT FROM FOREIGN COUNTRY

SOLD TO FOREIGN OWNERS (AN HOTEL

LOCATED IN ITALY BOUGHT FROM U.S. IS AN

OUTFLOW OF FUNDS - AN HOTEL LOCATED

IN U.S. AND SOLD TO AN ITALIAN IS AN INFLOW

OF FUNDS)

- NET INTERNATIONAL FLOW OF FINANCIAL DERIVATIVES

The OFFICIAL SETTLEMENTS BALANCE otherwise called BALANCE OF PAYMENTS, is the difference

between the U.S. increase of official reserve assets and the foreign increase of official reserve

assets ($).

FOREIGN DIRECT INVESTMENT = When HONDA build a production facility in Ohio, Japan does a

foreign direct investment which is different fron PORTFOLIO INVESTMENT which is when a

foreigner buies securities or shares in GENERAL MOTORS.

ISTAT = calculate the balance of payment.

Every central bank owns a sum of foreign currency to sell it and demand for its own currency, to

protect its economy OFFICIAL RESERVE ASSETS

BTP = BUONI DEL TESORO PLURIENNALI (TREASURY BOND IN U.S.A.) 3

NOMINAL EXCHANGE RATE e = TASSO DI CAMBIO

nom

How many units of a foreign currency can I get for one unit of my domestic currency?

REAL EXCHANGE RATE e = BENI E SERVIZI

How many units of a foreign good can I get for one unit of my domestic good?

In a FLEXIBLE or FLOATING EXCHANGE RATE SYSTEM e cannot remain the same. It changes

nom

according to the supply and demand in the foreign exchange market.

In a FIXED EXCHANGE RATE SYSTEM e cannot change because it has been fixed by the central

nom

bank (no financial risks).

= is a fixed exchange rate system working until 1972, the collapsed. In this

BRETTON WOODS system the value of foreign currencies were fixed in terms of U.S. dollar

which was set 35$ per ounce of gold. Today just some small realities, like

African countries, have a fixed exchange rate system.

SPOT e = how many dollars for 1€ NOW

nom

FORWARD e = how many dollars for 1€ in the FUTURE but:

nom it is taken into consideration by business men and implies a contract.

The two parties predeterminated the rate at which do the transaction in (i.e.) 90

days.

Today they sign a contract in which is predeterminated the exchange rate (they have decided

together) at which buy foreign currency at a specified time in the future.

HOW DO THEY THIS? In order to expectations. They have a look at the actual market and do

expectations about the future situation.

In a FLEXIBLE EXCHANGE RATE SYSTEM we talk about:

APPRECIATION or DEPRECIATION 4

APPRECIATION = a currency APPRECIATES when with few units you can buy unit of the foreign

currency.

Ex. 1,415$ = 1€ 1,225$ = 1€

$ has appreciated, risen, strengthened/ € has depreciated, fallen, weakened

DEPRECIATION = a currency DEPRECIATES when you need more units to buy one unit of the

foreign currency.

Ex. 1,225$ = 1€ 1,415$ = 1€

When a currency appreciates or depreciates the other currency related to it depreciates or

appreciates in order.

Se il dollaro guadagna un APPREZZAMENTO, vuol dire che servono poche unità di dollar per

comprare un euro. Allo stesso tempo, l’euro subisce un DEPREZZAMENTO nei confronti del dollar

perché viene scambiato per poche unità di dollaro. Diremo quindi che il dollar è più forte rispetto

all’euro, e l’euro si è indebolito nei confronti del dollar.

In a FIXED EXCHANGE RATE SYSTEM we talk about:

REVALUATION = STRENGTHENING OF THE CURRENCY when e INCREASES

nom

DEVALUATION = WEAKENING OF THE CURRENCY when e DECREASE

nom

CURRENCY UNION = a group of countries decide to adopt the same currency (EUROZONE)

DOLLARIZATION = when one country decide to adopt the currency of another country (which

have the dollar as its own currency and not the Danish krone, i.e.)

IMF WTO/ ICE/ SACE/ WB/ ECB

CAPITAL CONTROL = regulation laws to regulate the inflows and outflows.

1957 = TREATY OF ROME trattato che insieme al Trattatto che istituisce la Comunità europea

del carbone e dell’acciaio (TRATTATO CEEA, CECA o EURATOM e

firmato nel 1951) istituisce la Comunità europea. Conosciuto anche

con il nome di TCE O TFUE (Trattato sul funzionamento dell’UE).

coeteris paritus = elements should be constant. 5