Chapter 17: Macroeconomics and Trade Finance
Chapter 17 Introduction
Learning Objectives
After reading this chapter, you should be able to
- Describe the relationship between economics and trade finance.
- Describe major macroeconomic indicators in trade.
- Explain balance of payment and its components.
- Explain the calculation of current account, financial account, and capital account.
- Identify the reasons for a zero balance of payment.
- Explain the concept of the international investment position.
Think About It!
Video: The Difference Between Finance and Economics!
Source: Investopedia. (2015, December 3). The difference between finance and economics [Video]. YouTube. https://youtu.be/WSZpF3xUcfk?si=x_2l5T650dPGh3nX
Test Yourself
Introduction
A country’s macroeconomic performance helps companies to choose their trade partners. International finance helps to reflect an economy’s performance by using macroeconomic variables such as gross domestic product (GDP), unemployment, inflation, balance of payment, exchange rates, and interest rates. Balance of payment is one of the important indicators of an economy as it measures the difference between spending flowing into a country and spending flowing out of it.
In other words, it is any gap between a nation’s dollar value of its exports, or what its producers sell abroad, and a nation’s dollar value of imports, or the foreign-made products and services that households and businesses purchase. It can be calculated using three accounts: the current account, the capital or financial account, and the official international reserves account. The current account is made up of the value of its balance of trade in goods and services (i.e., the trade balance), net flows of incomes and net unilateral transfers. The capital account or financial account is the net value of flows of private financial assets in and out of a country.
The official international reserves account tracks changes in the official holdings of international reserves. This further helps in describing a country’s international investment position (IIP), which measures the total value of foreign assets held by domestic residents minus the total value of domestic assets held by foreigners.
