Definitions of balance of payment and current account

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Reference no: EM13733990

Question 1

Please respond to the following:

• Review the definitions of balance of payment and current account.

• Compare and contrast the continuous current account deficits of the U.S. with the continuous current account surpluses of Japan (identify differences and similarities).

• Discuss the likely consequences for both countries if the deficit and surplus roles are reversed in the next 10 years.

Question 2:

DEFINITION of 'Current Account'

The difference between a nation's savings and its investment. The current account is an important indicator about an economy's health. It is defined as the sum of the balance of trade (goods and services exports less imports), net income from abroad and net current transfers. A positive current account balance indicates that the nation is a net lender to the rest of the world, while a negative current account balance indicates that it is a net borrower from the rest of the world (http://www.investopedia.com/terms/c/currentaccount.asp).

DEFINITION of 'Balance Of Payments (BOP)'

A statement that summarizes an economy's transactions with the rest of the world for a specified time period. The balance of payments, also known as balance of international payments, encompasses all transactions between a country's residents and its nonresidents involving goods, services and income; financial claims on and liabilities to the rest of the world; and transfers such as gifts. The balance of payments classifies these transactions in two accounts - the current account and the capital account (http://www.investopedia.com/terms/c/balance of payments.asp).

The information about U.S and Japan is shocking. I would never imagine that U.S, as a huge country with some much of consuming and opportunity, has been since 1982 increasing deficits on current account. Unfortunately, it has increase even more. Good thing the current account deficit decline because of recession in 2006, year of starting the Great Recession. (Deficit is not a bad thing in developed Country, The huge difference between U.S and Japan is U.S developed country and Japan emergent country).

In the order hand, a such small country as Japan, was able to be very smart and invest the assets to became the biggest creditor of the world. Japan will continuous in the path for surplus. (emergent countries usually have surplus).

If U.S change its deficits for surplus, it will have a positive difference between a nation's savings and investment. A current account surplus indicates that a nation is a net lender to the rest of the world, in contrast to a current account deficit, which indicates that it is a net borrower.

If Japan change its surplus for deficits, it will have a current account deficit representing a negative net sales abroad. Developed countries, such as the United States, often run current account deficits, while emerging economies often run current account surpluses. Countries that are very poor tend to run current account deficits.

Question 3:

Please respond to the following:

• Who are the market participants in the foreign exchange market?

• How are foreign exchange transactions between international banks settled?

• Please provide specific examples.

Question 4:

The market participants that comprise the FX market can be categorized into five groups: international banks, bank customers, non-bank dealers, FX brokers, and central banks.

International banks provide the core of the FX market. These international banks serve their retail clients, the bank customers, in conducting foreign commerce or making international investment in financial assets that requires foreign exchange.

Non-bank dealers are large non-bank financial institutions, such as investment banks, mutual funds, pension funds, and hedge funds, whose size and frequency of trades make it cost- effective to establish their own dealing rooms to trade directly in the interbank market for their foreign exchange needs

FX brokers match dealer orders to buy and sell currencies for a fee, but do not take a position themselves. Interbank traders use a broker primarily to disseminate as quickly as possible a currency quote to many other dealers.

Central banks sometimes intervene in the foreign exchange market in an attempt to influence the price of its currency against that of a major trading partner, or a country that it "fixes" or "pegs" its currency against

How are foreign exchange transactions between international banks settled?

The interbank market is a network of correspondent banking relationships, with large commercial banks maintaining demand deposit accounts with one another, called correspondent bank accounts. The correspondent bank account network allows for the efficient functioning of the foreign exchange market. As an example of how the network of correspondent bank accounts facilities international foreign exchange transactions, consider a U.S. importer desiring to purchase merchandise invoiced in guilders from a Dutch exporter. The U.S. importer will contact his bank and inquire about the exchange rate. If the U.S. importer accepts the offered exchange rate, the bank will debit the U.S. importer's account for the purchase of the Dutch guilders. The bank will instruct its correspondent bank in the Netherlands to debit its correspondent bank account the appropriate amount of guilders and to credit the Dutch exporter's bank account. The importer's bank will then debit its books to offset the debit of U.S. importer's account, reflecting the decrease in its correspondent bank account balance.

Reference no: EM13733990

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