The
Balance of Payments: The measure of
money 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
·
Balance of Payments is divided into 3
accounts:
o
Current Account
o
Capital/Financial Account
o
Official Reserves Account
·
Whatever is purchased/sold appears twice
on the Balance of Payments.
Current
Account
·
Balance of Trade or Net Exports
o
Exports of goods/services – Imports of
goods/services
o
Exports create a credit to the balance of
payments.
o
Imports create a deficit to the balance of
payments.
·
Net Foreign Income
o
Income earned by US owned foreign assets –
Income paid to foreign held US assets
·
Net Transfers (tend to be unilateral)
o
Foreign aid = a debit to the current
account.
Capital/Financial
Account
·
Balance of capital ownership.
·
Includes the purchase of both real and financial
assets.
·
Direct investments in the United States is
a credit to the capital account.
·
Direct investments by US firms/individuals
in a foreign country are debits to the capital account.
·
Purchase of foreign financial assets
represents a debit to the capital account
·
Purchase of domestic financial assets by
foreigners represents a credit to the capital account.
Relationship
Between Current and Capital Account
·
Current Account and Capital Account should
zero each other out.
·
That is… If the current account has a
negative balance (deficit), the capital account should have a positive balance
(surplus).
Official
Reserves
·
The foreign country holdings of the US
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.
·
The official reserves zero out the balance
of payments.
Active
vs Passive Official Reserves
The US is passive in its use of
official reserves. It does not seek to manipulate the dollar exchange rate.
Equations:
·
Balance of Trade = Goods Exports + Goods
Imports
·
Balance on Goods & Services = (Goods
Exports + Service Exports) + (Goods Imports + Service Imports)
·
Current Account = Balance on Goods &
Services + Net Investments + Net Transfers
·
Capital Account = Foreign Purchases + Domestic
Purchases
