Unit 7: The Balance of Payments 5/4/17

Balance of Payments: Measure of money inflows and outflows between the U.S. and the rest of the world (ROW)
- Inflows are referred to as CREDITS
- Outflows are referred to as DEBITS

The Balance of Payments is divided into 3 accounts:
1) Current Account
2) Capital Financial Account
3) Official Reserves Account

Current Account:
Balance of Trade (Net Exports)
- Exports (-) Imports
- 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 U.S assets.

Net Transfers (tend to be unilateral):
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 U.S 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:
- Foreign currency holdings of U.S federal reserve system
- Balance of payments surplus- Fed accumulates foreign currency and debits the balance of payment
- Balance of payments deficit- Fed depletes its reserves of foreign currency and credits the balance of payment
- Official reserves zero out the balance of payments

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