5/4/17: Balance of Payments

• Balance of Payments-
• Measure of money inflows and outflows between the United State and the Rest of The World (ROW.)
• Inflows are referred to as DEBITS
• Outflows are referred to as DEBITS

• The Balance of Payments is divided into 3 accounts
• Current Account
• Capital/Financial Account
• Official Reserves Account
• 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 the U.S owned foreign assets- income paid to foreign held U.S assets.
• Ex)Interest payments on U.S owned Brazilian bonds- interest payments on German owned U.S treasury bonds.
• Net Transfers (tend to be unilateral)
• Foreign Aid- A debit to the current account.
• Ex) Mexican migrant workers send money to family in Mexico.
• Capital/Financial Account-
• Balance of capital ownership
• Includes the purchase of both real & financial assets
• Direct investment in the United States is a credit to the Capital Account.
• Ex) Toyota factory in San Antonio
• Direct investment by U.S firms/individuals in a foreign country are debits to the Capital Account.
• Ex) Intel factory in San Jose, Costa Rica
• Purchase of foreign financial assets represents a debit to the Capital Account.
• Ex) Warren Buffet buys stocks in Petrochina
• Purchase of domestic financial assets by foreigners.
• The United Arab Emirates sovereign wealth fund purchases a large stake in the NASDAQ.
• Official Reserves-
• Foreign currency holdings of the U.S Federal Reserve System.
• When there is a balance of payments surplus, the Fed accumulates foreign currency & debits the balance of payments.
• When there is a balance of payments deficit, the Fed depletes its reserves of foreign currency & credits the balance of payments.
• The official reserves zero out the balance of payments.

Formulas-

1. Balance of Trade-
• Net Exports Formula: Exports (-) Imports
2. Balance of Goods-
• Goods Exports + Service Exports (-) Goods Imports + Service Imports
3. Balance on Current Account-
• Balance of goods & services + Net Investments + Net Transfers
4. Balance on Capital Account-
• Domestic/Foreign Purchase
5. Official Reserves-
• Current Accounts (+, -) + Capital Account (-, +) = 0 (theoretically)