Unit 7: Balance of Payments

Balance of payments: a measure of money inflows and money outflows between the US and the rest of the world.

• Inflows are referred to as credits
• Outflows referred to as debits
• The balance of payment is divided into 3 accounts: 
• Current account: 
• Balance of trade or net exports: Exports is a credit or an asset, while import is a debit or a liability 
• Net foreign income or net investment: Income earned by US owned foreign assets, also incompasses income payed to foregin held US assets 
• Net transfers: Foreign aid. Tend to be unilateral. EX: US giving money to another country in a time of disaster. 
• Capital/ Financial: 
• Balance of capital ownership. Includes the purchase of both real (real estate) and financial assets (stocks and bonds). 
• Direct investment in the US is a credit to the capital account. Ex; Toyota factory in San Antonio. 
• Direct investments by US firms/ individuals in a foreign country are debits the capital account. Ex: Dell computer factory in Costa Rica
• The purchase of foreign financial assets represents a debit to the capital account. EX: Bill Gates buys stocks in PetrolChina
• Purchase of domestic financial assets by foreigners represents a credit to the capital account. Ex: Venezuela buys stock in Mcdonalds

***The capital and current account must zero each other out.

• Official reserves: 
• The foreign currency holdings of the US federal reserve system.
• The official reserves should zero out the balance of payments 

Formulas:

• Value of trade: 
• Goods export+goods imports
• Balance on goods and services:
• (Goods export+services exports)-(goods imports+services imports)
• Balance on current account :
• Balance of trades+net investments+net transfers
• Capital account 
• Foreign purchases of assets+The US purchase of assets abroad