May 4, 2017

Balance of Payments

Balance of Payments

• Measure of money inflows and outflows between the United States and the Rest of the World (ROW)
• Inflows=Credit
• Outflow=Debit
• Divided into Three Accounts

1. Current Account
2. Capital/Financial Account
3. Official Reserves Account 

Current Account

• Balance of Trade (Net Exports)
• Exports of goods and services/Imports of Goods and Services 
• Exports become credit to balance of payments
• Imputed become debit to balance of payments
• Net Foreign Income
• Income earned by US owned foreign assets- Income paid to foreign held to US assets
• Net Transfers 
• Foreign Aid ---> A debit to the current account 
• Ex: Mexican migrant workers send $ to family in Mexico

Capital/Financial Account

• The balance of capital ownership 
• Includes the purchase of both real and financial assets
• Direct investment in US is credit to capital account
• Ex: Toyota factory in San Antonio
• Direct investment by US firms/individuals in a foreign country and debits to the capital account 
• Ex: Intel factory in Costa Rica
• Purchase of foreign financial assets represents a debit to the capital account
• Ex: Warren buys stock in Petrochina
• Purchase of domestic financial assets by foreigners represents a credit to the capital account 
• Ex: The United Arab Emrite Sovereign wealth fund purchases a large stake in NASDQ

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