Unit 6

Balance of Payments

measure of money inflows and outflows between the U.S. And rest of the world (ROW)

• -inflows are refereed to as credits
• -outflows are refereed to as Debits

the balance of payments is divided into 3 accounts.

• -current account
• -capital / financial accounts

Current Account

Balance of Trade or Net Exports

• -exports or Goods/ services – import of Goods/ services.
• -Exports create a credit to the balance of payments.

Net Foreign Income

• -income earned by U.S. Owned foreign assets income paid to foreign held U.S owned Brazilian bonds – interest

Capital / Financial Account
balance of capital ownership
Includes the purchase of both real/ financial assets .
Direct investment in the U.S is a credit to the capital account.
Direct investment by U.S firms / individual in a foreign.
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.

• Relationship between Current and Capital Account

Current account and the capital account should zero each other out.
If the current account has a negative balance (deficit)

Official Reserves
foreign currency holdings of the U.S Fed systems .
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 vs. Passive Official Reserves
U.S. Is passive in the use of official reserves. Does not seek to manipulate exchange dollar.