Unit 7: Balance of Payments

5/8/17
Balance of payments 

• measure of money inflows and outflows between the US and the rest of the world (ROW)
• inflows are referred as credit
• outflows are referred as debits 

The balance of payments is divided into 3 accounts

•  Official reserves accounts 
  
•  Current account 
•  Capital/finance account 

 Balance of trade or net exports

•  Exports of goods and services -  imports of goods and services
•  Exports create a credits a balance of payments 
•  Imports create a debit to the balance of payments 

 Net foreign income

•  Income earned by US own foreign assets  -   Income paid to foreign health US assets 
• Ex:  interest payments on US only Brazilian bonds  -   Interest payments on German own treasury bonds 

 Net transfers
 Foreign aid --->   A debit to current account

• Ex:  Mexican migrant workers send money to family in Mexico 

 Capital/finance account

•  The balance of R ownership 
•  Includes the purchase of both real and financial assets 
•  Direct investments in the US is credits of capital account 
• Direct investments by US firm/individuals and a foreign country our debit so the capital account
•  Purchase a foreign financial assets represented a debit to capital account 
•  Purchase of domestic financial assets by foreigners represents a credit to the capital account 
• The united Arab emirates sovereign wealth fund purchase a large steak in the and a NASDAQ

 Relationship between current and capital account

•  The current account and the capital account should zero each other out 
•  If the current account has a negative balance then the capital account should have a positive balance of official reserves 
•  The foreign Currency holdings of the US Fed reserves SGS 
•  When there is a balance of payments surplus the Fed accumulates flooring Currency and debits 

 The balance of payments

•  When there is a balance with humans deficit the Fed the pleats it's reserves of foreign Currency and credits the balance of payments 
• The official reserves zero out the balance of payments

5/9/17

•  Balance of trade=  Good exports + goods imports 
• Balance of goods and services = good exports + service exports - goods imports + services imports
•  Currency account = balance of goods + services + not investments + net transfers 
•  Balance on capital account = investments or stocks and bonds 
•  Official reserves = current account ( whatever falls into the category of investments or stocks and bonds) +  Capital account = 0 

5/10/17
 Foreign exchange

•  The buying and selling of Currency 
•  Any transactions that occurs in the balance of payment necessitates foreign exchange 
•  The exchange rate is determined in the foreign Currency market 

Exchange rate  determinants

•  Consumer taste 
  
•  Relative income 
•  Relative  price level
•  Speculation 

-appreciation of the money causes American goods to to be expensive and foreign goods to be cheaper than us reducing exports and increasing   Imports
- depreciation of the money causes American goods to be cheaper and foreign goods to be more expensive does increasing exports in reducing imports
5/11/17
- specialization-individuals and countries can be made by better off if they will produce in what they have a comparative advantage and then trade with other  countries for whatever else they want/need
- absolute advantage - The producer that can produce output or requires the least amount of input
- comparative advantage - The producer with the Lowe's opportunity cost
- Country should trade if they have relatively lower opportunity cost
- they should specialize in the good that is cheaper for them to produce
Input versus output
- an output problem presents the data as products produced given a set of resources
Ex: Number of pens produce
- an input problem presents the data as amount of resources needed to produce a fixed amount of output
Ex: Number of labor hours to produce 1 bushel
- when identifying  an absolute advantage and input problems change the scenario friend who can produce a given product with least amount of resources