Balance of payment Unit 7

Balance of Payments

• The measure of money inflows and outflows between the US and the rest of the world (ROW)
• Inflows are credits
• Outflows are debits
• Balance of Payments is divided into 3 accounts 
• Current account
• Capital / financial Account
• Balance of Payments
• The measure of money inflows and outflows between the US and the rest of the world (ROW)
• Inflows are credits
• Outflows are debits
• Balance of Payments is divided into 3 accounts 
• Current account
• Capital / financial Account
• Official Reserves Account
Official Reserves Account
• Current Account
• Balance of Trade or Net Exports
• Exports of goods/services - imports of goods/services
• Exports create a credit to the balance of payment
• Imports create a debit to the balance of payment

• Net Foreign Income
• (Income earned by U.S. owned foreign assets) - (Income paid to foreign U.S. assets)
• Example: Interest payments on U.S. owned Brazillian bonds - Interest payment on German-owned U.S. treasury bonds
• New Transfers (tend to be unilateral)
• Foreign Aid is a debit to the current account
• Example: Mexican migrant workers send money to family in Mexico
• Relationship Between Current and Capital Account
• Zero each other out
• The current account has a negative balance (deficit) then capital account have a positive balance (surplus)
• Official Reserves
• Foreign currency holdings of the US Federal Reserve System
• 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 reserve of foreign currency and credits the balance of payments
• The Official Reserves zero out the balance of payment