THE INTERNATIONAL FINANCE

The history of the international financial system is a complex one. Throughout this century there has been an increase in international links through both trade flows and capital movements. This has led to a rise in the degree of interdependence between different countries. As a result, the form which the international financial system takes has become more important in influencing standards of living in all countries throughout the world.

Capital flows. The movements of capital between countries are classified either as current account movements or capital account movements. Current accounts movements mean paymentsfor imports and exports as well as the payment of interest and dividends. During any year a given country will have either surplus or a deficit of current account transactions. Capital account movements mean buying orselling of securities in one country by citizens of another country. Such transactions will also result in a net surplus or deficit for a given country. A net deficit of both current account and capital account transactions represents the net financial resources that have flowed out of the country; a net surplus represents the financial resources that have flowed into a country. Trading, nations have developed an accounting concept, called balance of payments, which records a country's trade and capital movement in relation to other countries. The part of the balance of payments which records imports and exports is called the trade balance. The 1998 USA balance of payments is said to be favorable, as it showed $72 billion surplus. Deficits, which are said to be unfavorable, have to be financed. Large deficits can have a disturbing effect on a country's national economy (as in Ukraine), and governments usually try to avoid them Deficits are financed by borrowing from international organizations or by shipping gold or foreign money to the surplus country abroad. If the deficit has been financed and the surplus lent, the balance of payment is said to be in balance. Countries with a deficit are called debtor nations. Countries with a surplus are called creditor nations.

Fluctuations in foreign currency exchange rates All financial and economic transactions between countries are measured in terms of money. But each country has its own currency (dollars, marks, francs, etc.) in which it will demand payment for net surpluses. The value of one currency relative to another depends on which country has a net deficit to the other. If Germany, for example, has a net surplus to Ukraine, the value of the German mark will rise relative to the hryvnia. This relative value is indicated by the exchange rate, which represents the cost of oneunit of a given currency in termsof another. Exchange rates fluctuate over time depending on changes in the net deficit and surpluses of different countries. These fluctuations influence future deficits and surpluses if, for example, Germany has a net deficit to Japan, the value of the mark will fall relative to the value of yen. It will take then more marksto buy yen and more marks for Germans to buy Japanese goods, causing German imports of Japanese goods to decline. The exchange rate is important because of its role in restoring a balance between deficit and surpluses. In different countries capital movementsare the field of exchange rate movements giving rise to interest rate (securities and currencies transactions at different stock exchanges). The next field of the international finance is methods of payment that are agreed between the buyer and the seller (a. payment in advance, b. different types of letters of credit, c. payment upon shipment of the goods, d. documentary collections, e. open account); and the instrument (where instructions are written) by which the payment is made that is the method of settlement (payment by check, bank transfer, SWIFT, draft, bank money order, TT (telegraphic transfer), MT (mail transfer), Bill of Exchange). And at last, financial institutions act as financial intermediaries between potential lenders (savers) and potential borrowers. These institutions may be classified in a number of different ways:

· by nature of the business transacted (banking, insurance, stock broking);

· by the source and use of funds (local, foreign, demand or savings deposits);

· by ownership (private or public, that is state owned or local/foreign);

· by the nature of the market and the end use (retail or wholesale).

Vocabulary:

trade flow – товаропотік

interdependence – взаємозалежність

standard of living – рівень життя

current account movements – зміни (рух) поточного рахунку

capital account movements – зміни (рух) рахунку руху капіталів

net – чистий

surplus – профіцит, надлишок

(un)favorable – (не)сприятливий

disturbing effect – шкідливий вплив (ефект)

shipping – відвантажування, відправка

to lend (lent; lent) – надавати в кредит

debtor – боржник, позичальник

to restore – відновлювати

payment in advance – передоплата, достроковий платіж

letter of credit (LC; L/C; LOC) – акредитив

open account – контокорент (відкритий, поточний рахунок)

instrument – документ; цінний папір

method of settlement – метод здійснення розрахунків (оплати)

SWIFT (Society for Worldwide Interbank Financial Telecommunication) – організація всесвітнього міжбанківського фінансового зв’язку

draft – тратта

Bill of Exchange – вексель

demand deposit – безстроковий вклад, вклад до запитання

savings deposit – ощадний внесок

Questions:

1. What can you say about the history of the international financial system?

2. Speak about capital flows. How are they classified?

3. What accounting concept have nations developed?

4. How are the deficits financed?

5. What terms are economic and financial transactions measured in? Explain how it happens.

6. What are the fields of exchange rate movements?

7. What methods of payment do you know?

8. Enumerate all methods of settlement by which the payments are made.

9. How may financial institutions be classified?

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