Unit 7

Balance and payment - measure of money inflows and outflows between the united states and the rest of the world

• Inflows are refereed as CREDITS
• Outflows are refereed to as DEBIT

The balance of payements is divided into 3 accounts

• current
• Capital/financial
• Official Reserves

Double entry bookkeeping - every transaction in the balance of payments is recorded twice in accordance with standard accounting practice

• Notice that 2 transactions affect each other. Theoretically the balance payments should always equal 0

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 opposite
• Net Foreign Income
• Income earned by US owned foreign assets income paid to foreign held US assets
• Net transfers (tend to be unilateral)
• Foreign Aid - a debit tot he 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 tot he capital account
• Direct investment by US firms in a foreign country are debits to the capital account
• Purchase of foreign financial assets represents a debit tot he capital account
• Purchase of domestic financial assets by foreigners represents a credit assets by foreigners represents a credit to the capital account.

Relationship between current and capital account

• The current account and the capital account should 0 each other out
• If current account has a negative balance, then capital account should have positive balance

Official Reserve system

• The foreign currency holdings of the U.S. 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
• Official reserves 0 out the balance of payment