Unit 7 Balance of Payments

Balance of Payments: it is a measure of money inflows and outflows between the U.S and the rest of the world.

• Inflows => Credits
• Outflows => Debts

The balance of payments is divided into three accounts: 

i. Current Account

ii. Capital/Financial Account

iii. Official reserves

Current Account:

- Balance of trade (net exports): Exports [credit/assets] - Imports [Debt/Liabilities]

- Net foreign income/ net investment:income owned by U.S owned foreign assets.Income paid to foreign hill U.S assets.

- Net Transfers: Foreign aid & lateral (one direction) ex. U.S given country to another country. (wealthy related, famine, disaster, etc. Another example would be a foreigner working in America and sending money back to their home country.

Capital/Financial: 

-  Balance of capital ownership includes purchase of both real and financial assets.

•  Real = real estate
• Financial = Stocks and Bonds

Direct Investment in the U.S is a credit to the capital account. (ex. Toyota factor in San Antonio)

- Direct Investment by U.S firms/individuals in a foreign country or debts to the capital account. (ex. - Dell computer factory in Costa Rica)

- The purchase of foreign financial assets represents a debt to the national account.

- Purchase of domestic financial assets by foreigners represents a credit to the capital account.

(ex. Venezuela buys stock in McDonalds)

  

The capital and current account must ZERO each other out.

Official reserve: the foreign currency holdings of the U.S federal reserve system the official reserves should add zero out of the balance of payments.

EQUATIONS:

• Balance of trade: good exports + goods import
• Balance on goods and services: goods exports + service exports - goods imports + service imports
• Capital Account: Foreign purchase of assets + the U.S purchase of assets abroad
• Balance of current account: Balance of Trade + Net investment + Net transfers