UNIT VII Balance of Payments

Balance of Payments
-it is a measure of 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 are divided into three accounts
first: current account
second: capital/financial account
-third: official reserves

Current Account

-balance of trade or net exports
exports is known as credit or asset
import is debit or liability

-net foreign income or net investment
income earned by US owned foreign assets
encompasses income paid to foreign-held US assets

net transfers
-foreign aid
-tends to be unilateral, one direction
-example: US gives money to another country, disaster, aid
-would simply be a foreigner working in america and they send it back to home country

Capital/Financial Account
-balance of capital ownership
-includes purchase of both real and financial assets
-real assets: real estate
-financial assets: stocks and bonds
-direct investment in the US is a credit to the capital account
Toyota factory in San Antonio
-direct investment by US firms/individuals in a foreign country or debits to the capital account
Dell computer factory in Costa Rica
-purchase of foreign financial assets represents a debit to the capital account
Bill Gates by stock in petro-China
-purchase of domestic financial assets by foreigners represent a credit to the capital account
Venezuela buys stock in McDonalds

Official Reserves
-the capital and current account must zero each other out
-official reserves: the foreign currency holdings of the US federal reserve system
the official reserves should zero out the balance of payments

Balance of trade
-good exports + good imports

Balance on goods and services
-(goods exports + services exports) - (good imports + services imports)

balance on current accounts
-balance of trade + net investments + net transfer

capital account
-foreign purchase of assets + the US purchase of assets abroad