May 4, 2017

Balance of payments

• Measure of money inflows and outflows between the United States and the rest of the world (ROW)
• Balance of payments is divided into three accounts: current account, capital/financial account,

Inflow

• Referred to as credits

Outflow

• Referred to as debits

Current account

• Balance of trade or net exports
• Exports of goods/services - import of goods/services
• Exports create a credit to the balance of payments
• Imports create a debit to the balance of payments
• Net foreign income
• Income earned by U.S. owned foreign assets - income paid to foreign held in U.S. assets
• Ex: interest payments on U.S. owned Brazilian bonds - interest payments on German owned U.S. treasury bonds
• Net transfers
• Foreign aid -> a debit to the current account

Capital/financial account

• The balance of capital ownership
• Includes the purchase of both real and financial assets
• Direct investment in the United States 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 represents a debit to the capital account
• Purchase of domestic financial assets by foreigners represents a credit to the capital account

Official reserves

• The foreign currency holdings of the United States 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

Balance of trade

• Exports - imports

Balance of goods and services

• Goods exports + services exports - goods imports + services imports

Balance on current account

• Balance of goods and services + net investment + net transfers

Balance on capital account

Official Reserves

• Current account ( +, -) + Capiptal account )-, +) = 0 theoretically