How will the balance of payment accounts of the developing countries change, given the rapid increase in exports from, and FDI flow to these countries?
Balance of payment (BoP) accounts refers to any accounting records of monetary transactions made between one country and the rest of the world. These transactions are inclusive of the payments vouched for export and import of goods. Balance of payments accounts are usually a summary of all financial transactions made by a country. A large volume of exports and imports in developing countries indicates a free economy.
An increase in exports and Financial Direct Investments (FDI) is indicative of a developed capital market. Theoretically, BoP is usually zero. A positive capital and financial accounts show that the country’s debts are more than the credits. An increase in FDI leads to an inflow of foreign capital within a country. Export of goods by developing countries also brings in more foreign capital within a country (International Monetary Fund 2009).
What crisis is happening in Europe, and how could it impact international business?
Europe is facing a major debt crisis. The debt crisis is shorthand for the struggle the European continent has to undergo to pay its accumulative debts. The European debt crisis is a key focal point for the world’s business and financial markets. One of the effects of the crisis will be the retrenching of European banks from the non-core geographies. The European markets performed worse when the crisis took center stage, and investors feared for the worst (International Monetary Fund 2009).
Do you expect the current global monetary system to change shortly following the crisis that is happening in Europe?
The Eurozone crisis is expected to have an impact on the current global monetary system. The world’s global financial systems are fully connected. This means that the debt crisis for Europe is of global concern. The dollar is at the helm of the international currency. The US contributes approximately 40% of its budget to IMF leading to a financial strain in which the IMF has to contribute to bailing out the indebted nations (Subrahmanyam 2009).
Case Study Questions
Does the US dollar as an International currency provide an advantage for US business in international trade?
The US dollar as a medium of exchange for international business is an advantage to US business. Hedging considerations, exchange-rate risk, and herding make the currency the best international exchange currency. The hedging considerations provide the necessary impetus for traders to use the currency for international transactions. This proves to be a positive gain for the US international traders in the international arena since they do not incur the cost of hedging (Fisher et al. 2006).
Can the euro replace the US dollar as an international currency?
An international currency should have a majority share in the financial reserves of several nations around the globe. This currency should also be used as a medium of exchange in international trade. The currency should feature as the main choice in financial markets. The euro is on the roadmap to international currency position due to its increased foreign reserve. In the same measure, the dollar has depreciated by 22% as compared to the euro, which signifies stability. The euro has grown as an intervention and pegging currency in the recent past. These factors make it possible for the euro to replace the dollar as an international currency (Fisher et al. 2006).
Can ASEAN countries introduce a common currency?
ASEAN countries should make a consideration of introducing a common currency, just like European nations utilize the euro. This, however, will depend on the consideration of factors that affect the optimal currency area. This region is characterized by the internal mobility of labor and capital. This is a major characteristic of the ASEAN region.
Do you think the international monetary system is fair?
The international monetary system is fair since it provides a flexible way of conducting international business without any major hiccups. It facilitates cross-border investments and international trade. The international monetary system also helps in avoiding the exchange-rate risk and herding a situation where traders are bound to copy each other. The monetary system provides means of payment that are acceptable to buyers and sellers of different nationalities (Fisher et al. 2006).
Fisher, G, Hughes, R, Griffin, R & Pustay, M 2006, International business: managing in the Asia Pacific, Pearson Education, Melbourne.
International Monetary Fund, 2009, “Contractionary Forces Receding but Weak Recovery Ahead,” World Economic Outlook, vol. 4 no. 7, pp. 1-8.
Subrahmanyam, G 2009, “Global Financial Crisis of 2008-09: Triggers, Trails, Travails, and Treatments,” The IUP Journal of Applied Economics, Vol. VIII no. 5, pp. 1 -44.