Multinational Financial Management

The Balance of Payments and International Economic Linkages

I had a trade deficit in 1986 because I took a vacation in France. I didn't worry about it; I enjoyed it.

HERBERT STEIN Chairman of the Council of Economic Advisors under Presidents Nixon and Ford

We have almost a crisis in trade and this is the year Congress will try to turn it around with trade legislation.

LLOYD BENTSEN Former U.S. Senator from Texas

Despite all the cries for protectionism to cure the trade deficit, protectionism will not lower the trade deficit.

PHIL GRAMM Former U.S. Senator from Texas

LEARNING OBJECTIVES

• To distinguish between the current account, the financial account, and the official reserves account and describe the links among these accounts
• To calculate a nation's balance-of-payments accounts from data on its international transactions
• To identify the links between domestic economic behavior and the international flows of goods and capital and to describe how these links are reflected in the various balance-of-payments accounts

A key theme of this book is that companies today operate within a global marketplace, and they can ignore this fact only at their peril. In line with that theme, the purpose of this chapter is to present the financial and real linkages between the domestic and world economies and examine how these linkages affect business viability. The chapter identifies the basic ...