BALANCE OF PAYMENTS

Measure of money inflows and outflows between US and the rest of the world

-inflows are referred to as credits

-outflows are reffered to as debits

Current account

-Balance of trade or net exports

.exports of goods/services-inports of goods/services

.exports create a credit to the balance of payments

.imports create a debit to the balance of payments

-Net foreign income

.income earned by the us owed foreing assets-income paid to foreign held U.S assets

-Net transfers

.foreign aid-> a debit to current account

Capital financial account

-Balance of capital ownership

-includes the purchase of both real and financial assets

-direct investment in the united states is a credit to the capital account

-direct investment by U.S firms/individuals in a foreign country are debits the capital account

-purchase of foreign financial assets represents a debit to the capital account

-purchase of domestic fiancial assets by foreigners representatives a credit ro the capital account

Relationship between current and capital

-they must be equal to zero

-that is if current has a negative balance, then the capital account should then have a positive balance 

Official reserve account

-the foreign currency holdings of the United States federal reserve system

-when there is a balance of payments surpls the fed accumulates foreign currency and debits the balance of payments

-when there is a balance of payments defitcit the fed depletes its reserves kf foreign currency and credits the balance lf payments 

-OR will zero out balance of payments

Active vs passive official reserve

-the united states is passive in its use of official reserves it does not seek to manipulaye the dollar exchange ratel