May 4, 2017 - Balance of Payments
10:54 PM
Measure of money inflows and outflows between the United States and the Rest of the World
- Inflows are referred to as CREDITS
- Outflows are referred to as DEBITS
The Balance of Payments is divided into 3 accounts
- Current Account
- Capital/Financial Account
- Official Reserves Account
Current Account
- Balance of Trade or Net Exports
- Exports of Goods/Services - Import of Goods/Services
- Exports create a credit to the balance of Payments
- Imports create a debit to the balance of payments
- Net Foreign Income
- Income earned by U.S. owned foreign assets -Income paid to foreign held U.S. assets
- Ex. Interest payments on U.S. owned Brazilian bonds - Interest payments on German-owned U.S. Treasury bonds
- Net Transfers (tend to be unilateral)
- Foreign Aid -> a debit to the current account
- Ex. Mexican migrant workers send money to family in Mexico
Capital/Financial Account
- The balance of capital ownership
- Includes the purchase of both real and financial assets
- Direct investment in the United States is a credit to the capital account
- Ex. The Toyota Factory in San Antonio
- Direct Investment by U.S. firms/individuals in a foreign country are debts to the capital account
- Ex. The Intel Factory in San Jose, Costa Rica
- Purchase of foreign financial assets represents a debt to the capital account
- Ex. Warren Buffet buys stock in Petrochina
- Purchase of domestic financial assets by foreigners represents a credit to the capital account
- The United Arab Emirates sovereign wealth fund purchases a large stake in the NASDAQ
Current Account with Financial Account = 0
Official Reserves
- The foreign currency holdings of the United States Federal Reserve System
- When there is a balance of payments surplus the Fed accumulates foreign currency and debits the balance of payments
- When there is balance of payments deficit the Fed depletes its reserves of foreign currency and credits the balance of payments
- The Official Reserves zero out the balance of payments
Balance of Trade: Exports - Imports
Balance of Goods and Services: (Goods Exports + Services Exports) - (Goods Imports + Services Imports)
Balance on Current Account: Balance of goods and services + Net investments + Net transfer
Balance of Capital Account: Direct investment and purchase of stocks and bonds
Official Reserves: Current Account + Capital Account = 0
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