The Balance of Payments
Notes from 4/27/16
Balance of Payments- Measure of money inflows and outflows between the United States and the rest of the worlds
-Inflows---> CREDITS
-Outflows---> DEBITS
Balance of Payments is divided into 3 accounts
1. Current Account
2. Capital/ Financial Account
3. Official Reserves Account
Current Account
Balance of Trade or Net Exports
-Exports of Goods/Services - Imports of Goods/Services
-Exports create a credit
-Imports create a debit
Net Foreign Income
-Income earned by the U.S owned foreign assets - Income paid to foreign held U.S. assets
-Example: Interest payments on the U.S. owned Brazilian bonds - Interest payments on German owned U.S. Treasury bonds
Net Transfers (tend to be unilateral)
-Other states sending money to other states
-Foreign aid is a debit to the current account
-Example: Mexican immigrant workers send money to family in Mexico
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 U.S. firms/ individuals in a foreign country are debits to the capital account
-Purchase of foreign financial assets represent a debit to the capital account
-Purchase of domestic financial assets by foreign represents a credit to the capital account
Relationship Between Current and Capital Accounts
-Current and Capital accounts should ZERO each other out
-If current account has a negative balance (deficit), then the capital account should have a positive balance
Official Reserves
-The 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
-SHOULD ZERO OUT THE BALANCE OF PAYMENTS
Active v. Passive Official Reserves
-The U.S. is passive in its use of official reserves. It does not seek to manipulate the dollar exchange rate
-JaelyNoTainted
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Get it?
Love the blog Jaelyn! I appreciate the examples given in this post to elaborate on net transfers and net foreign income. Maybe an example for the capital account such as a Japanese man buying U.S. stocks would help readers as well.
ReplyDeleteI find your blog to be very useful. But when explaining that the u.s. is passive it might be helpful to explain what being active means. For example the republic of China is active and they buy and sell dollars in order maintain a steady exchange rate with the u.s.
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