The Balance of payments
- Balance of payments – the measure of money inflows and outflows between the US and rest of the world
- Inflows – credits
- Outflows – debits
- Balance of payment is divided into three
- Current account
- Capital account
- Official reserves
- Current account
- Balance of trade or net exports
- Exports of goods and services – imports of goods and 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 US owned foreign assets. Income paid to foreign held US assets. (Example: interest payments on US on Brazilian bonds – interest payments or German on the US treasury bond)
- Net transfers – foreign aid is a debit to the current account. (Example: Mexican migrant workers send money to Mexico)
- Capital account
- Balance of capital ownership
- Includes the purchase of both real and financial assets
- Direct investment in the US is a credit to the capital account
- Direct investment by US firms or 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
- If the current account has a negative balance, the capital account should be positive
- Official reserves
- Foreign currency holdings of the US Fed
- When there is a balance of payments sir plus, the Fed accumulates foreign currency and debits the balance of payments
- When there is a balance of payments deficit, the Fed depletes it's reserves of foreign Currency and credits the balance of payments
- The official reserves zero out the balance of payments
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