Balance Of Payments

May 4, 2017

Balance of Payments

• Measure of money inflows and outflows between the U.S and the rest of the world (ROW)
• Inflows= Credits
• Outflows= Debits
• Balance of Payments divided into 3 accounts
1. Current Account
2. Capital/Financial Account
3. Official Reserves

1. Current Account
• Balance of Trade/Net Exports
1. Exports of goods/services-imports goods/services
2. Exports creates a credit to balance of payments
3. Imports create debit
• Net Foreign Income
1. Income earned by US foreign assets - income paid to foreign held US assets
• Net transfers (tend to be unilateral)
1. Foreign aid= a debit to current account.
2. Capital/ Financial Account
• Balance of capital ownership
• Includes purchase of both real and financial assets
• Direct investment in U.S is credit to capital account
• Direct investment by U.S firms/ individuals in foreign country are debits to capital account
• Purchase of foreign financial assets (debit to capital account)
• Purchase of domestic financial assets by foreigners represents credit.

*current account and capital account zero each other out.*

1. Official Reserves
1. Foreign currency holdings of U.S Fed. Reserve Sys.
2. When there is a balance of payments surplus, the Fed accumulates foreign currency and debits the balance of payments.
3. When there is balance deficit, the Fed depletes reserves of foreign currency and credits balance.

*Official Reserves zero out balance of payments