Unit 7 - Balance of Payments

April 9, and April 13, 2015

Measure of $ inflows and outflows between the U.S and the rest of the world.

• Inflows are referred to as credits
• Outflows are referred to as debits

Balance of payments are divided into three accounts

• Current account
• Capital/Financial account
• Official reserves account

Double entry book keeping: Every entry in the balance of payments is recorded twice in accordance with standard accounting practice.

Current Account: Balance of trade or net exports

•  Balance of trade or net exports: Exports of goods and services - imports of goods and services - exports create a credit to the balance of payments - imports (Create Debt)
• Net foreign income: Income earned by U.S owned foreign assets - income paid to foreign held U.S assets.
• Net transfers: Foreign aid > Debit to the foreign account

Capital/Financial Account: The balance of capital ownership includes the purchase of both real and financial assets. Direct investments in the U.S is a credit to the capital account. Purchase of foreign financial assets represent debit to the capital account.

(relationship between current and capital account: Current and capital account should zero each other)

Official Reserves: The foreign current holdings of the U.S federal reserves system.

Active Vs. Passive: U.S is passive in its use of official reserves, doesn't seek to manipulate the dollar exchange rate.