Measure of money inflows and outflows between the U.S. And rest of the works (ROW)
- inflow referred to credit
- outflows are referred to debits
- inflow referred to credit
- outflows are referred to debits
1. Current Account
2. Capital/Financial account
3. Official Reserve account
2. Capital/Financial account
3. Official Reserve account
Double Entry Bookkeeping:
Every transaction in the balance of payments is recorded twice in accordance w/standard accounting practice.
Every transaction in the balance of payments is recorded twice in accordance w/standard accounting practice.
Balance of Trade or net export
Export of goods/service - imports of goods/services
Export of goods/service - imports of goods/services
Export create credit.
Imports create debit.
Imports create debit.
Net foreign income:
Income earned by US owned foreign assets - income paid to foreign held US assets.
EX. interest payments to US owned Brazilian bonds - interest payment on German owned US treasury bonds.
Income earned by US owned foreign assets - income paid to foreign held US assets.
EX. interest payments to US owned Brazilian bonds - interest payment on German owned US treasury bonds.
Net transfer (tend to be unilateral)
A debit to current account to foreign aid.
Ex. Mexican migrant workers send money to family in mexico.
A debit to current account to foreign aid.
Ex. Mexican migrant workers send money to family in mexico.
Capital/Financial accounts
- The balance of capital ownership includes the purchase of both real and financial assets
- direct investment in US is a credit to capital account
Ex. Toyota factory in San Antonio
- direct invest by US firms/individual in a foreign country are debit to the capital account.
Ex. Intel factory in San Jose, Costa Rice
- purchase of foreign financial assets rep. a debit to capital account.
- purchase a large stake in NASDAQ
- The balance of capital ownership includes the purchase of both real and financial assets
- direct investment in US is a credit to capital account
Ex. Toyota factory in San Antonio
- direct invest by US firms/individual in a foreign country are debit to the capital account.
Ex. Intel factory in San Jose, Costa Rice
- purchase of foreign financial assets rep. a debit to capital account.
- purchase a large stake in NASDAQ
- The current account & capital account should zero each to her out.
- if current account has a negative balance (deficit) then the capital account should the. Have a positive balance (surplus)
- if current account has a negative balance (deficit) then the capital account should the. Have a positive balance (surplus)
Official Reserve:
- foreign currency holding 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.
- foreign currency holding 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.
Active v. Passive official reserves
- the US is passive in its use of official reserves. It doesn't seek to manipulate the dollar exchange rate.
- the US is passive in its use of official reserves. It doesn't seek to manipulate the dollar exchange rate.
Balance of Trade: Goods & Service exports - goods & service important
Trade Deficit: Import > export
Trade Surplus: Exports > import
Goods exports + good imports
(Informal way)
(Informal way)
Balance on Good & Service: Good imports + service imports
Current Account: Balance on trade + net investment + net transfer
Capital account: Foreign purchase of US assets + US purchase of assets abroad
Official Reserve: Current account balance + capital account balance.
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