Balance of Payments- 05/08/17

Balance of Payments

• Balance of Payments:
  -Measure of money inflows and outflows between the U.S and the rest of the world.
  -Inflows are referred to as CREDITS
  -Outflows are referred to as DEBITS
• Divided into 3 Accounts1) Current Account
  2) Capital/ Financial Account
  3) Official Reserves Account
• Current Account:
  -Balance of Trade or Net Exports
  -Exports (-) Imports
  -Exports create a credit to the balance of payments
  -Imports create a debit to the balance of payments
  
  Net foreign income is earned by U.S. owned foreign assets (-) income paid to the foreign held U.S. assets.
  Net Transfers are foreign Aids or a debit to the 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 to the capital account
  -Direct invest by U.S firms/ individuals in a foreign country are debits to the capital account.
  -Purchase of foreign financial assets represents a debit to the capital account.
  -Purchase of domestic financial assets by foreigners represent a credit to the capital account.
  
  
• Relationship between a Capital and Current Account:
  -They should zero each other out
  -That is... if the current account has a negative balance (deficit), then the capital account should then have a positive balance (surplus)
• Official Reserves:-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 BOP
  -The Official Reserves zero out the BOP