UNIT 7
BALANCE OF PAYMENTS measure of money inflows and outflows between the U.S and the rest of the world
Inflow (Credits)
Outflows(Debits)
3 Accounts
1.CURRENT ACCOUNT
Balance of trade or net exports
-Exports/Imports of goods and 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
Net transfer
- Foreign aid= a debit to the current account
2.CAPITAL/FINANCIAL ACCOUNT
-The balance of capital ownership
- Includes the purchase of both real and financial assets
- Direct investment in the U.S is a credit to the CA
- Direct investment by the U.S firms/individuals in a foreign country are debits to the capital account
RELATIONSHIP BETWEEN CURRENT AND CAPITAL
- They should ZERO each other out
- If the current account has a negative balance(deficit) them the capital account should then have a positive balance(surplus)
3.OFFICIAL RESERVES
- Foreign currency holding of the U.S federal reserve system
-When the balance of payments surplus the fed accumulates foreign currency and debits the balance of payments
- When the balance of payments deficit of the fed depletes its reserves of foreign currency and credits the balance of payments
- Official reserves zero out the balance of payments
ACTIVE V. PASSIVE OFFICIAL RESERVES
-U.S is passive in its use of official reserves. It does not seek to manipulate the dollar exchange rate
-China is active
EQUATIONS
- Balance of trade
Goods exports + Goods imports
-Balance on goods and services
Goods exports + Service exports + Good imports + Service imports
-Currents Account
Balance on goods and services + Net investment + Net transfers
-Capital Account
Foreign purchases + Domestic Purchases
ACTIVE V. PASSIVE OFFICIAL RESERVES
-U.S is passive in its use of official reserves. It does not seek to manipulate the dollar exchange rate
-China is active
EQUATIONS
- Balance of trade
Goods exports + Goods imports
-Balance on goods and services
Goods exports + Service exports + Good imports + Service imports
-Currents Account
Balance on goods and services + Net investment + Net transfers
-Capital Account
Foreign purchases + Domestic Purchases
I like how colorful your notes are. You said a direct investment in the U.S. is a credit to the capital account so a Factory in New York would be a credit to the capital account.
ReplyDeleteSo if a country was to purchase something from another country, that would be put down as a debit to their accounts. And if another country was to purchase a product from them, that would be a credit to their account. Which has to do with what you said, that an inflow of money would be a credit and an outflow would be a debit to the account. That also applies to making investments. If China were to invest in U.S companies, that would be a debit to them and a credit to us, so they should zero each other out.
ReplyDeleteWow!Thanks for the formulas. Did you know that when there is a balance if payments deficit the Fed depletes foreign currency and credits the balance if payments?
ReplyDeleteoh, nice you should include some examples for the three accounts like Katya's example/ suggestion other than that good job.
ReplyDelete