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International Corporate Finance: Value Creation with Currency Derivatives in Global Capital Markets, + Website by Laurent Jacque

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CHAPTER 4

The Balance of Payments

Money is sent from one country to another for various purposes: such as the payment of tribute or subsidies; remittances of revenue to or from dependencies, or of rents or other incomes to their absent owners; emigration of capital, or transmission of it for foreign investment. The most usual purpose, however, is that of payment for goods. To show in what circumstances money actually passes from country to country for this or any other purposes mentioned, it is necessary briefly to state the nature of the mechanism by which international trade is carried on, when it takes place not by barter but through the medium of money.

John Stuart Mill, 1848

The dollar is looking vulnerable. It is propped up not by the strength of America's exports, but by the vast imports of capital. America, a country already rich in capital, has to borrow almost $2 billion net every working day to cover a current account deficit forecast to reach $500 billion this year. To most economists, this deficit represents an unsustainable drain on world savings. If the capital inflows were to dry up, some reckon that the dollar could lose a quarter of its value. Only Paul O'Neill, America's former treasury secretary, appears unruffled. The current account deficit, he declares, is a “meaningless concept” which he talks about only because others insist on doing so.

The Economist (September 14, 2002)

Globalization is reshaping the world economy by deepening the web of international ...

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