Unit 5 cont.- Balance of Payments

Unit 5 - Balance of Payments

What is it? Measure of many inflows and outflows between the U.S and the rest of the world (ROW)

Inflows are referred to as CREDITS
Outflows are referred to as DEBITS 
Balanced of payments is 8 into 3 accounts
-current
-capital/financial
-official reserves

Current Account

Balance of trade or net exports
-Exports of goods/services.
-Exports create a credit to balance of payments.
-Imports create a debit to the balance of payments. 
-Net foreign income
-Income earned by U.S foreign held U.S assets.
-Net transfers (Tend to be unilateral)
-Foreign aid-debit to the current account

Capital/Financial Account

-Balance of capital ownership 
-includes purchase of both real and financial assets.
-Direct investment in the U.S is a credit to the capital account.
-Direct investment by the U.S firms/ individuals in a foreign country are debits to the capital account. 
Purchase of domestic financial assets by foreigners represents a credit to the capital account.
-United Arab Emirates \wealth funds purchases a large state in the NASPAQ 

Relationship between current and capital account

-Remember double entry bookkeeping.

Current account and capital account should zero each other out. 

-That is if current account has a negative balance (deficit), then the capital account should then have a positive balance (Surplus)

Official Reserves

 Foreign currency holdings of the U.S 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 a balance of payments deficit the Fed depletes its reserves of foreign currency and credits the balance of payments. 

Official reserves zero 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 money exchange rate.

• Balance of Trade

Goods + goods

Exports  Inputs

Balance on goods and serves

Goods + Services + Goods + service

Exports  Exports     Inputs     Inputs

Current Account

Balance on goods and services + Net investments + net transfer

Capital Account

Foreign Purchase + domestic purchase.