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.
-The balance
of payments is divided into 3 accounts:
*Current account.
*Capital/financial account.
*Official reserves account.
CURRENT ACCOUNT
Balance of trade or net exports
-Exports of
goods and services – import of goods and services.
-Exports
create a debit to the balance of payments.
Net foreign income
-Income earned
by U.S. owned by foreign assets – income paid to foreign held U.S. assets.
Net transfers
-Foreign aid
-> 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.
-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.
RELATIONSHIP BETWEEN CURRENT AND
CAPITAL ACCOUNT
-The current
account and the capital account should zero each other out.
-That is if
the current account has a negative balance (deficit), then the capital account
should have a positive balance (surplus).
OFFICIAL RESERVES
-The foreign
currency holding 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 payment.
-When there
is a balance of payment deficit, the FED depletes its reserves of foreign
currency and credits the balance of payments.
-The official
reserves zeros out the balance of payment.
ACTIVE VS PASSIVE OFFICIAL RESERVES
-The U.S. is
passive in its use of official reserves. It does not seek to manipulate the
dollar exchange rate.
