Unit 7 Balance of Payments

May 4, 2016

 Balance of Payments

:Measure of money inflows and outflows between the U.S. and the rest of the world. 

Inflow = credits

Outflow = debits

Balance of payment divided:

1. Current Account

2. Capital/Financial Account

3. Official Reserves Account

Current Account: 

• Balance of Trade of Net Exports

             - Exports = credit to balance

              -Imports = debit to balance

• Net Foreign Income
• Net Transfers (tend to be unilateral)

               -Foreign Aid = debit to current account

Capital/Financial Account:

• Balance of capital ownership
• Includes the purchase of both real and financial assets 
• Direct investments in the US is a credit to the capital account
• Direct investment by US 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 represents a credit to the capital account.

               

         *Current Account and Capital account should zero each other out.*

Official Reserves 

The foreign currency holdings of the US Federal Reserve System

Balance of payments surplus = Fed accumulates foreign currency

BOP payments = Fed depletes its reserves of foreign currency 

*Official Reserves zero out BOP*

Active vs. Passive Official Reserves

• US is passive in its use of official reserves.
• It does not seek to manipulate the dollar exchange rate