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BALANCE OF TRADE:Balance of Payments Equilibrium, Public Policy and Financial Stability

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Management of Financial Institutions - MGT 604
VU
Lecture # 5
BALANCE OF TRADE
·
The balance of trade is the difference between the monetary value of exports and
imports in an economy over a certain period of time.
·
A positive balance of trade is known as a trade surplus and consists of exporting
more than is imported;
·
A negative balance of trade is known as a trade deficit or, informally, a trade gap.
Physical balance of trade
·
Monetary balance of trade is different from physical balance of trade (which is
expressed in amount of raw materials). Developed countries usually import a lot of primary
raw materials from developing countries at low prices.
·
Often, these materials are then converted into finished products, and a significant
amount of value is added
Factors that can affect BOT
1.
Exchange rates
2.
Trade agreements or barriers
3.
Other tax, tariff and trade measures
4.
Business cycle at home or abroad.
Balance of Payment
·
The Balance of Payments (or BOP) measures the payments that flow between any
individual country and all other countries. It is used to summarize all international economic
transactions for that country during a specific time period, usually a year.
·
The BOP is determined by the country's exports and imports of goods, services, and
financial capital, as well as financial transfers. It reflects all payments and liabilities to
foreigners (debits) and all payments and obligations received from foreigners (credits).
Current Account
·
The current account is the sum of net sales from trade in goods and services, net
factor income (such as interest payments from abroad), and net unilateral transfers from
abroad.
·
Positive net sales to abroad correspond to a current account surplus; a negative net
sale to abroad correspond to a current account deficit.
Capital account (or financial account)
·
The financial account is the net change in foreign ownership of domestic assets. If
foreign ownership of domestic assets has increased more quickly than domestic ownership
of foreign assets in a given year, then the domestic country has a financial account
surplus.
·
The financial account is the net change in foreign ownership of domestic assets. If
foreign ownership of domestic assets has increased more quickly than domestic ownership
of foreign assets in a given year, then the domestic country has a financial account
surplus.
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Management of Financial Institutions - MGT 604
VU
Balance of Payments Equilibrium
Is defined as a condition where the sum of debits and credits from the Current Account and
the Financial Account equal zero;
Current Account + Financial Account = 0
Challenges of a Central Bank
1. Economic Growth
Economic growth is the increase in value of the goods and services produced by an
economy. It is conventionally measured as the percent rate of increase in real gross
domestic product, or GDP.
2. Poverty Reduction
In politics, the fight against poverty is usually regarded as a social goal and many
governments have -- secondarily at least -- some dedicated institutions or departments.
3. Unemployment
Unemployment is the condition of willing workers lacking jobs or "gainful employment".
In economics, unemployment statistics measure the condition and extent of joblessness
within an economy.
4. Inflation
Inflation is the persistent rise in the general price level as measured against a standard level
of purchasing power. There are many varying measures of inflation in use because different
prices affect different people.
5. Stability in Forex Rate
Central banks play an important role in the foreign exchange markets. They try to control
the money supply, inflation, interest rates and often have official or unofficial target rates
for their currencies.
Public Policy and Financial Stability
·  It seems useful at the outset to define financial stability and to do so by defining it's
opposite, financial instability. The most useful concept of financial instability for central
banks and other authorities involves some notion of market failure or externalities that can
potentially impinge on real economic activity.
·  With this definition of financial instability, a clear public policy interest arises for
central banks and other authorities to act in two distinct roles in pursuing financial
stability--prevention of instability and management of the consequences once markets
become unstable.
Independence of Central Banks
·  In this context, independence is usually defined as the central bank's operational and
management independence from the government.
·  World Bank, the BIS, and the IMF are strong supporters of central bank independence.
Governments generally have some degree of influence over even "independent" central
banks; the aim of independence is primarily to prevent short-term interference.
·  For example, the chairman of the U.S. Federal Reserve Bank is appointed by the
President of the U.S., and his choice must be confirmed by the Congress.
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Table of Contents:
  1. Financial Environment & Role of Financial Institutions:FINANCIAL MARKETS &INSTITUTIONS
  2. FINANCIAL INSTITUTIONS:Non Banking Financial Companies
  3. CENTRAL BANK:Activities and responsibilities, Interest Rate Interventions
  4. POLICY INSTRUMENTS:Open Market Operations, Capital Requirements
  5. BALANCE OF TRADE:Balance of Payments Equilibrium, Public Policy and Financial Stability
  6. STATE BANK OF PAKISTAN:History, Regulation of Liquidity, Departments
  7. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS:Banking Inspection Department
  8. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Debt Management
  9. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Training Programs by SBP
  10. STATE BANK OF PAKISTAN - VARIOUS DEPARTMENTS (Contd.):Human Resources Department
  11. MAJOR DRIVERS OF FINANCIAL INDUSTRY:GLOBAL FINANCIAL SYSTEM, The World Bank
  12. INTERNATIONAL FINANCIAL INSTITUTIONS:ADB Projects in Pakistan, Paris Club
  13. PAKISTAN ECONOMIC AID & DEBT:Macroeconomic Stability, Strengthening Institutions
  14. INCREASING FOREIGN DIRECT INVESTMENT:Industrial Sector, Managing the Debt
  15. ROLE OF COMMERCIAL BANKS:Services Typically Offered by Banks, Types of banks
  16. ROLE OF COMMERCIAL BANKS:Types of investment banks, The Management of the Banks
  17. ROLE OF COMMERCIAL BANKS:Public perceptions of banks, Capital adequacy, Liquidity
  18. ROLE OF COMMERCIAL BANKS:Problem bank management, BANKING SECTOR REFORMS
  19. ROLE OF COMMERCIAL BANKING:Private Deposit Insurance,
  20. BRANCH BANKING IN PAKISTAN:Remittances, Online Fund Transfer
  21. ROLE OF COMMERCIAL BANKS IN MICRO FINANCE SECTOR
  22. Mutual funds:Types of international mutual funds, Mutual funds vs. other investments
  23. Mutual Funds:Criticism of managed mutual funds, Money Market Fund
  24. Mutual Funds:Balanced Funds, Growth Funds, Specialized Funds, Measuring Risks
  25. Mutual Funds:Cost of Ownership, Redemption Fee, Reports to Shareholders
  26. Mutual Funds:Internet Fraud, The Pyramid Scheme, How to Avoid Investment Fraud
  27. Mutual Funds:Investing In International Mutual Funds, How to Pre-Select a Mutual Fund
  28. Role of Investment Banks:Recent evolution of the business, Possible conflicts of interest
  29. Letter of Credit:Elements of a Letter of Credit, Commercial Invoice, Tips for Exporters
  30. Letter of Credit and International Trade:Terminology, Risks in International Trade
  31. Foreign Exchange & Financial Institutions:Investment management firms, Exchange Traded Fund
  32. Foreign Exchange:Factors affecting currency trading, Economic conditions include
  33. Leasing Companies:Basic Purpose of Leasing, Technological Benefits
  34. The Leasing Sector in Pakistan and its Role in Capital Investment
  35. Role of Insurance Companies:Indemnification, Insurer’s business model
  36. Role of Insurance Companies:Life insurance and saving
  37. Role of financial Institutions in Agriculture Sector:What is “Revolving Credit Scheme”?
  38. Agriculture Sector and Financial Institutions of Pakistan:What is SMEs
  39. Can Government of Pakistan Lay a Pivotal Role in this Sector?:Business Environment
  40. Financial Crimes:Process of Money Laundering, Terrorist Financing
  41. DFIs & Risk Management:Managing Credit Risk, Managing Operational Risk
  42. Banking Fraud & Misleading Activities:Rogue Traders, Uninsured Deposits
  43. The Collapse of ENRON:Auditing Issues, Corporate Governance Issues, Corrective Actions
  44. Classic Financial Scandals:Corruption, Discovery, Black Wednesday
  45. RECAP:FINANCIAL INSTITUTIONS, CENTRAL BANK,