Balance of Payments -

Balance of Payments - 

• Balance of Payments
• A measure of money in flows and out flows between the U.S. and the rest of the world
• In flows = Credits
• Out flows = Debits

• The balance of payments is divided into three accounts
• Current account
• Capital/Financial account
• Official reserves
• The capital and current account, must zero each other out

• Current Account:
• Balance of trades or Net exports
• Export: Credit/Asset
• Import: Debit/Liability
• Net foreign income/Net Investment
• Income earned by U.S. owned foreign assets
• Income paid to foreign held U.S. assets
• Net transfers
• Foreign aid
• Unilateral
• ex. U.S. giving money to another country due to famine, weather, etc.
• Capital/Financial Accout
• Balance of capital ownership
• Includes the purchase of both real (real estate) and financial (stocks and bonds) assets
• Direct investment in the U.S. is a credit to the capital account
• ex. Toyota factory in San Antonio bc Japan makes Toyotas
• Direct investment by U.S. firms/individuals in a foreign country are debits to the capital account
• ex. Dell computer factory in Costa Rica
• The purchase of foreign financial assets represent a debit to the capital account
• ex. Bill Gates buys stock in Petro-China
• Purchase of domestic financial assets by foreigners represents a credit to the capital account
• ex. Venezuela buys stocks in McDonalds
• Official Reserves
• The foreign currency holdings of the U.S. Federal Reserve system
• The official reserves should zero out the balance of payment

• Formulas - 

• Balance of trade
• good exports + good imports
• Balance on goods and services
• (goods exports + services exports) - (good imports + services imports)
•  balance on current accounts
• balance of trade + net investments + net transfer
• capital account
• foreign purchase of assets + the US purchase of assets abroad