International business transactions are expanding every day in both developed and developing countries that are engaged in the transfer of goods and services across borders. The trend over the last two decades has seen an attempt to establish international norms of behavior and principles for the way that business is conducted throughout the world. But for these principles to have any impact they must be enshrined in law, international conventions, or be based on universal agreements in the form of voluntary codes. Show This article offers a theoretical and practical analysis of principles of international business transactions. International business transactions are deals made between parties from two or more different nation-states. International business transactions can include sales of goods or services, leases, licenses, and investments. The parties to international business transactions are usually multinational companies, but this is not always the case. Both individuals and small companies can participate in international business transactions. For example, small firms can export or import a small quantity of goods to only one country, or a very large global firm can have integrated operations and strategic alliances around the world. An important distinction should be made among the different types of international firms – there are independent subsidiaries which act essentially as domestic companies and global operations that are integrated subsidiaries, but very well connected with the parent company. And this is vital in understanding the firm’s strategy, organization and functional aspects, such as financial, administrative, operational aspects. Principles of international business transactions and the means by which the law regulates international business transactions have changed accordingly to the structural changes in the world legal order itself. Today, business is international and there is a general expectation that this will continue for the foreseeable future. The growth of international business transactions in the last half of the twentieth century is due to both liberalization of trade and investment and the growth of technology. For instance, the General Agreement on Tariffs and Trade (GATT) negotiation rounds resulted in trade liberalization, and this was continued with the formation of the World Trade Organization (WTO) in 1995. In the meantime, worldwide capital movements were liberalized by most governments. Moreover, the European Union introduced the new European monetary unit, the euro, into circulation in January 2002. This impacted international business economically. In regard to the second point, technological development made global communication and transportation relatively easy and convenient. The principles of international business transactions are different than the ones of domestic business transactions because the environment changes when a firm crosses international borders. Typically, an organization understands the domestic environment quite well, but is less familiar with the environment in other countries. In order to understand the foreign market, firms have to invest more time and resources and get exposure to the new framework. The economic environment can be very different from one nation to another. Countries are often divided into three main categories: the more developed, the less developed or third world countries, and the newly industrializing or emerging economies. Aside from the economic level, the education, infrastructure, and government control can affect all aspects of doing international business. And a foreign company must be sure it understands such environment to operate successfully. Contact us, your international business attorney in Florida, to assist you with your international business transactions. Malescu Law P.A. – Business Lawyers
The balance of payments summarises the economic transactions of an economy with the rest of the world. These transactions include exports and imports of goods, services and financial assets, along with transfer payments (like foreign aid). The balance of payments is an important economic indicator for ‘open’ economies like Australia that engage in international trade because it summarises how resources flow between Australia and our trading partners. This Explainer looks at the structure of Australia's balance of payments.
The Structure of the Balance of PaymentsAustralia's balance of payments captures the transactions between Australian ‘residents’ and the rest of the world, in a given period. ‘Residents’ are defined broadly to include people who live in Australia, businesses that operate in Australia, the Australian government and other organisations that operate here. The balance of payments divides transactions into two broad accounts:
In essence, the current account captures the net flow of money that results from Australia engaging in international trade, while the combined capital and financial accounts capture Australia's net change in ownership of assets and liabilities. These broad accounts are often referred to as the ‘two sides’ of the balance of payments. The balance of payments are put together according to international standards (set out by the International Monetary Fund (IMF) and the United Nations) that make it easier to compare Australia's balance of payments with that in other countries. The Current AccountThe current account records the value of the flow of goods, services and income between Australian residents and the rest of the world. There are three components to the current account – the ‘trade balance’, ‘primary income balance’ and ‘secondary income balance’. In economic analysis or commentary, most attention is usually given to the trade balance, which records the difference between the value of our exports and imports of goods and services. This is because the trade balance forms part of gross domestic product (see Explainer: Economic Growth).
The term ‘current’ is used in describing the current account because the goods, services and income being traded in will be consumed or received in the current period (specifically, within the quarter). The Capital and Financial AccountThe combined capital and financial account records the capital and financial transactions between Australia and the rest of the world. The capital account component records two main types of transactions involving capital. The first is ‘capital transfers’, where one party has transferred ownership of something to another party without receiving anything in return; capital transfers include conditional grants for specific capital projects (e.g. a foreign aid project to build roads) and forgiveness of debt. The second type of transaction involves ‘non-financial, non-produced assets’; this type of asset includes intangible assets (e.g. brand names) as well as rights to use land or water (e.g. for mining or fishing).
The much larger financial account component records transactions between parties that involve a change of ownership of Australia's assets or liabilities. It is structured according to the different classes of investment that owners of these assets or liabilities can undertake.
Accounting FrameworkDouble EntryAny transaction has two sides. In an economic transaction, something of economic value is provided and something of equal value is received. This notion is reflected in the ‘double entry’ accounting framework used in the balance of payments. In this framework, for every transaction between an Australian resident and the rest of the world, the balance of payments will record two entries. When economic value is provided a credit entry is made, and when an economic value is received a debit entry is made. The credit and the debit will be for the same amount, but the credit will be recorded as a positive entry and the debit will be a negative entry. For example, when a shipment of wheat is exported from Australia to an overseas buyer, a credit entry will be made in the balance of payments reflecting the value of the shipment that has been provided to the overseas buyer. On the other side of the transaction, the Australian seller receives a payment for the wheat shipment and this payment is recorded as the offsetting debit entry. Since every transaction in the balance of payments has two offsetting entries, the total balance of payments should be zero. Net Errors and OmissionsWhile the total balance of payments should be zero, this does not always occur in practice. This can be due to measurement errors, because it is difficult to accurately record every single transaction between Australian residents and the rest of the world. And sometimes transactions are not measured at all – they are ‘omitted’. Because of this there is an additional item included in the balance of payments, known as ‘net errors and omissions’, to ensure that it always balances.
To help illustrate the distinction between different economic transactions and how they are recorded in the balance of payments, consider the following examples.
The Relationship Between the AccountsThe current account is always offset by the capital and financial account so that the sum of these accounts – the balance of payments – is zero. The logic underlying this, and represented in the double-entry accounting framework, is that the value of whatever is traded (recorded in the current account) is offset by a movement of some form of asset to pay for it (recorded in the capital and financial account). Consequently, when the balance of one account is in surplus (i.e. has a positive value, representing a credit), the balance of the other account must be in deficit (i.e. has a negative value, representing a debit). We can summarise the relationship between the accounts with an example of Australian economic developments. Australia has tended to borrow from overseas, reflecting investment in the Australian economy. The capital flowing into Australia is recorded as a credit in the balance of payments and has been associated with a capital and financial account surplus. This surplus is matched by a current account deficit (recorded as a debit). Part of the reason for Australia's current account deficit is the interest Australia pays to the rest of the world on its international borrowing.
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