Unit 7- Balance of Payments (05/08/17)

Balance of Payments

• Measure of money inflows and outflows between the United States 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:

- 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 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 or a pension payment to an American retiree living in the Bahamas.
Net Transfers (tend to be unilateral)

• Foreign Aid → a debit to the current account

- Ex. Mexican migrant workers send money to family in Mexico (remittances)

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

- Ex. The Toyota Factory in San Antonio

• Direct investment by U.S. firms/individuals in a foreign country are debits to the capital account

- Ex. The Intel Factory in San Jose, Costa Rica

• Purchase of foreign financial assets represents a debit to the capital account.

- Ex. Warren Buffet buys stock in Petrochina.

• Purchase of domestic financial assets by foreigners represents a credit to the capital account. 
• The United Arab Emirates sovereign wealth fund purchases a large stake in NASDAQ.

Relationship between Current and Capital Account

• The Current Account and the Capital Account should zero each other out.
• That is… If the Current Account has a negative balance (deficit), then the Capital Account should then have a positive balance (surplus).

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.