Balance of Payments

Balance of Payments

• Measures of money inflows and outflows between the United States and the rest of the world
• Inflows are referred to as credits
• Outflows are referred to as debits

Balance of Payment is divided into 3 accounts

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

Double Entry Book Keeping

• Every transaction in the balance of payments is recorded twice in accordance

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 the U.S owned foreign assets
• Net Transfers
• Foreign Aid- Debit to the current account
• Ex- migrant worker sending money to family

Capital/ Financial Account

• 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- Toyota company in San Antonio
• Direct Investment by United States in foreign countries are debits to the capital accounts
• 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

Relationship between Current and Capital Account

• Current account and the capital account should zero each other out
• If current account has a negative balance (deficit) then capital account should then have a positive balance (surplus)

Official Reserves

• Foreign currency holding of the United States Fed
• 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 

Active vs. Passive Official Reserves

• United States is passive in its use of official reserves. 
• Does not seek to manipulate the dollar exchange rate
• People's Republic of China is aactive in its use of official reserve. 
• Actively buys and sells dollars in order to maintain a steady exchange rate w/ the United States

Formulas

• Balance of Trade
• Good exports + Goods Imports
• Balance on Goods & Services
• Good Exports + Services Exports + Good Imports + Service Imports
• Current Account
• Balance on Goods and Services + Net Investment + Net Transfers
• Capital Account
• Foreign Purchases + Domestic Purchases