Unit 6

Balance of Payments

Is a measure of money inflows and outflows between the United States and the rest of the world. (ROW)
- Inflows are referred to as CREDITS
- Outflows are referred to as DEBIT

The balance of Payments is divided into 3 accounts
- Current Account
- Capital/Finance
- Official reserves

Double Entry Bookkeeping
- Every transaction in the balance of Payments is recorded twice in accordance with standard accounting practice.
    Ex US manufacturer John exports $50 million worth of farm equipment to Ireland.
     - a credit of 50 million to the current account
    
Current Account
- Balance of trade or net exports
        Exports of goods and services - import of goods and services

        Exports create a credit to the balance of Payments

        Imports create a debit to the balance to the balance of Payments

Net Foreign Income
- Income earned by US owned assets - income paid to foreign held U.S. assets
Ex. Interest payments on US owned Brazilian bonds minus interest payments on German ownered US Treasury bonds

Net Transfers (tend to be one sided)
Ex. Mexican migrant workers workers send money to family in Mexico.

Capital/ Financial account
- the 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 to the capital account.
Ex. The intel factory

- Purchase of foreign financial aasets represents a debit to the capital account.
Ex. Warren buffet buys stocks in Petrochina.

- Purchase of domestic Fianacal assrts by foreigners represents a credit to the capital account.

Relationship between current and capital account.
- the current account and capital account should zero eachother out.