In a previous article, we introduced the CFA Institute
Investment Foundation Program (Read
more here). It is a free program
designed for anyone who wants to enter or advance within the investment
management industry, including IT, operations, accounting, administration, and
marketing. Candidates who successfully
pass the online exam earn the CFA Institute Investment Foundations Certificate.
There are total of 20 Chapters in 7 modules, covering all
the essential topics in finance, economics, ethics and regulations. This series of articles will highlight the
core knowledge of each chapter.
Chapter 6 provides an overview of macroeconomics. The
learning outcome of chapter 6 is as follows:
·
Define imports and exports and describe the need
for and trends in imports and exports;
·
Describe comparative advantages among countries;
·
Describe the balance of payments and explain the
relationship between the current account and the capital and financial account;
·
Describe why a country runs a current account
deficit and describe the effect of a current account deficit on the country’s
currency;
·
Describe types of foreign exchange rate systems;
·
Describe factors affecting the value of a
currency;
·
Describe how to assess the relative strength of
currencies;
·
Describe foreign exchange rate quotes;
·
Compare spot and forward markets.
International trade is the exchange of products, services,
and capital between countries. The WTO members' merchandise exports totalled
US$ 17.43 trillion in 20171.
Imports refer to products and services that are produced
outside a country’s borders and then brought into the country. For example,
many countries in the European Union import natural gas from Russia.
Exports
refer to products and services that are produced within a country’s borders and
then transported to another country. For example, Japan exports consumer
electronics to the rest of the world.
The Need for Imports and Exports:
·
Gain access to resources
·
Create additional demand for products and
services
·
Provide greater choice to customers
·
Improve quality and/or reduce the prices of
products and services
Two major trends have promoted international trade: fewer
trade barriers and better transportation and communications.
Countries often specialise in products and services for
which they have a comparative advantage—that is, products and services that
they can produce relatively more efficiently than other countries.
The balance of payments tracks transactions between
residents of one country and residents of the rest of the world over a period
of time, usually a year. Analysing a country’s balance of payments helps in
understanding the country’s macroeconomic environment.
The balance of payments includes two accounts:
·
The current account indicates how much the
country consumes and invests (outflows) compared with how much it receives
(inflows). It is primarily driven by the trade of products and services with
the rest of the world—that is, exports and imports.
·
The capital and financial account records the
ownership of assets. In particular, it reflects investments by domestic
entities in foreign entities and investments by foreign entities in domestic
entities. These investments can be acquisitions of production facilities or
purchases and sales of financial securities, such as debt and equity
securities.
A country may run a current account deficit because it needs
to import many goods to help its economy evolve or because its consumption far
exceeds its production and its ability to export. A persistent current account
deficit may cause a depreciation of the country’s currency relative to other
currencies.
Reference:
Sample Question:
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