3. Balance of payments

The balance of payments is a summary statement of all economic transactions between one country and all other countries over a period of time, usually one year.

The balance of payments is divided into current account and capital account. The current account is a record of all the goods and services the nation exchanged with other nations. The capital account includes all kinds of international transactions, such as private foreign investment and government borrowing, lending, or payment.

One of the most significant aspects of the balance of payments is a nation’s import and export activity. The way imports and exports stack up at the end of each year is referred to as a nations balance of trade.

If a country exports more than it imports, it has a favourable balance of trade, called a trade surplus. If it imports more than exports, it has an unfavourable balance of trade, or a trade deficit.

A nation’s balance of trade plays a central role in determining its balance of payments – the overall flow of money into or out a country. Other factors affecting the balance of payments are investments, profits from such investments and foreign aid. A favourable balance of payments, or balance of payments surplus, means that more money is coming into a country from abroad than leaving it. An unfavourable balance of payments, or balance of payments deficit, means that more money is leaving the country than entering it.

Nations with a deficit normally try to solve this problem by reducing their dependence on foreign goods, reducing investments abroad, devaluing their currency, pr increasing their exports. Often these steps involve making politically controversial move then may reduce the demand for foreign-made goods, but also lead to higher prices and greater unemployment.

Thus we can say that the balance of payments is an indicator of the international economic health of a country. Its data help government policy makers plan monetary, fiscal, foreign-exchange and commercial policies.

4. Foreign direct investments

Foreign investments may be divided into two components: portfolio investment, which is the purchase of stocks and bonds for the purpose of obtaining a return on the funds, invested, and direct investment, by which the investors participate in the management of the firm in addition to receiving a return on their money.

Foreign direct investment (FDI) is a complex form of international business. It involves ownership and control of a company in a foreign country by an organization based in another country. FDI mean a long-term commitment where capital funds will be tied up for a long time.

Although a direct investment usually is acquired by transferring capital from one country to another, capital is not usually the only contribution made by investor. The investment firm may supply technology, personnel and markets in exchange for an interest in a firm located abroad.

Companies engage in direct investment abroad for the same reasons they pursue international trade:

-to expand markets by selling abroad

-to acquire foreign resources (raw materials, knowledge).

Financial considerations are also the most important and decisive factors. Although a direct investment may be substitute for trade it also may stimulate trade through sales of components, equipment.

Since most direct investments are intended for selling the output in the country governmental restrictions that prevent the effective importation of goods are probably the most compelling force causing firms to establish their direct investments. Direct investment sometimes has chain effects.

One explanation for direct investment is that investors perceive a monopoly advantage over similar companies in the countries to which they go.

In many countries there is a resistance to FDI. Some strategic industries (food, energy, nuclear reactors) will find it increasingly difficult to expand abroad. But direct investment is likely to continue its adventurous course in many areas. The economic integration of the US, Europe and Japan will stimulate its development.