Unit 7: introduction to balance and trade

April 26, 2016
Balance of payments
-measure of many inflows and outflows between the U.S. and the rest of the world.

• inflows are credits
• outflows are debits

3 different balance of accounts

1. current account
2. capital/ financial account
3. official reserves account

Current account
-balance of trade or net exports

• exports (credit)
• imports (debit)

exports of goods/services-imports of goods/services
exports create a credit to balance payment

Net foreign income

• income earned by the U.S. owned foreign assets

Net transfers

• foreign aid= a debit to the current account 

Capital/financial account

• balance of capital ownership
• includes the purchase of both real and financial assets
• direct investment by U.S. firms/ individuals in a foreign country are debits to capital account.
• purchase of domestic financial assets by foreigners represents a credit to the capital account.

Relationships between current and capital account

• remember double bookkeeping 
• the current account and capital account should zero each other out.
• that is if the current account has a negative balance and capital has a positive balance. 

Official reserves

• Foreign currency holders of the U.S. federal reserve system.
• when there is a balance pf payment surplus the fed accumulates foreign currency and debits the balance of payment..

Active vs passive official reserves

• the U.S is passive in the use of official reserves. it does not seek to manipulate the dollar exchange rate.