-Inflows are referred to as credits-
-Outflows are referred to as debits-
The balance of payment is divided into three accounts:
1. Current account
2. Capital/financial account
3. Official reserves account
Double entry book keeping
-Every transaction in the balance of payments is recorded twice in accordance
Current account
Balance of trade or Net exports-Exports of goods/services- import 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 U.S. owned foreign assets
-Interest payments on U.S. owned foreign assets- Interest payments on German-owned U.S treasury bonds.
Net transfers (tend to be Unilateral).
-Foreign aid- a debit to the current account.
-Example- Mexican migrant worker sends money to family.
Capital / Financial Aid
-The balance of capital ownership.
-Includes the purchase of both real and financial asset
Direct investment in the United States is a credit to the capital account.
-For example the Toyota company in San Antonio
Direct investment by United States firms/individuals in a foreign country are a debit to the capital account.
-Intel factory construction in Germany
Purchase of foreign financial assets represents a Debit to the capital account.
-Warren buffets buys stock in Petrochina.
Purchase of domestic financial assets by foreigners represents acredit to the capital account.
-The UAE sovereign wealth fund purchases a large stake in the NASDAQ.
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 then have a positive balance (surplus).
Official reserves
-The foreign currency holdings of the U.S. fed.
-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 the balance of payments.
Active v. passive official reserves
-The U.S. is passive in its use of official reserves. It does not seek to manipulate the dollar exchange rate.
-The People's Republic of China is active in its use of official reserves. It actively buys and sells dollars in order to maintain a steady exchange rate w/ the United States.
Formulas
1. Balance of trade:
- Good exports + goods imports
2. Balance on goods & services:
- Goods exports + service exports + goods imports + service imports.
3. Current Account:
- Balance on goods and services + net investment + net transfers
4. Capital account:
- Foreign purchases + domestic purchases.
Your blog looks so high tech! Remember that credit = asset = gain and debit = liability = spending (from the US perspective of course).
ReplyDeleteFor example, a country with a large trade deficit is essentially borrowing money to purchase goods and services, but a country with a large trade surplus is essentially doing the opposite.
ReplyDelete