Unit 4 Macro Economics - The Balance of Payments

Official Reserves? Credit and Debit?

*FED's Account* The foreign currency holdings of the United States Federal Reserve System

Real Investment? Credit and Debit?

*Land, Buildings* Investment in Real State -Credit: Direct investment in the United States is a credit to the capital account Example: he Toyota Factory in San Antonio -Debit: Direct investment by U.S. firms/individuals in a foreign country are debits to the capital account Example :The Intel Factory in San Jose, Costa Rica

Portfolio Investments? Credit and Debit?

*Stocks/Bonds* Ownership of Financial Assets -Credit: purchase of domestic financial assets by foreigners represents a credit to the capital account Example: The United Arab Emirates sovereign wealth fund purchases a large stake in the NASDAQ. -Debit: Purchase of foreign financial assets a represents a debit the capital account Example: Warren Buffet buys stock in Petrochina.

What are the 3 accounts B of P is divided into?

-Current Account -Capital/Financial Account -Official Reserves Account

Passive Official Reserves?

A country does *not* seek to manipulate their exchange rate -Example: The US

Active Official Reserve?

A country is *active* in its use of official Reserves/ It actively buys and sells dollars in order to maintain a steady exchange rate of another country -Example: China and the US

Current Account?

Basically Trade of Goods/Services -Balance of Trade or Net Exports -Net Foreign Factor Income -Net Transfers

Financial/Capital Account?

Basically assets such as stocks, bonds, land, buildings, etc -Portfolio Investments -Real Investment

What causes Capital/Financial Flows?

Differences in rates of return on investment

Net Foreign Factor Income? Credit and Debit?

Income Earned by US owned foreign assets -Credit: Interest Payments on US owned Brazillian Bonds -Debit: Interest Payments on German owned US Treasury Bonds

Balance of Payments

Measure of money inflows and outflows between the United States and the Rest of the World (ROW)

Net Transfers (Aid, Charity)? Credit and Debit? Example?

Money sent to another account -Credit: N/A -Debit: Foreign Aid -> A debit to the current account -Example: Mex migrant workers send money to fam in Mexico

Inflows

Referred to as CREDITS

Outflows

Referred to as DEBITS

Balance of Trade? Credit and Debit?

The import/export of Goods/Services -Exports create a credit to the balance of payments -Imports create a debit to the B of Payments

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

The Current Account and the Capital Account should...

zero each other out -If the Current Account has a negative balance (deficit), then the Capital Account should then have a positive balance (surplus).