Unit 7: Balance of Payments

Unit 7: Balance of Payments

- It is the measure of money inflows and outflows between the United States and the rest of the world.

- Inflows are known as credits.

- Outflows are known as debits.

- Balance of payments is divided to 3 accounts:

1. Current Account
2. Capital/Financial Account
3. Official Reserves

-Every transaction in the balance of payments is recorded twice.

Current Account	Capital/Financial Account	Official Reserves
-       Net exports/ balance of trades (exports-imports) -       Net foreign factor payment (Income earned by US owned foreign assets) -       Net transfers (foreign aid)	-       Balance of capital ownership (includes purchase of real and financial assets) -       Direct investment in the US is a credit to the capital account (Ex: Toyota factory in San Antonio) -       Direct investment by US firms/ individuals in a foreign country are debts to capital account. (Ex: Dell Computer factory in Costa Rica.) -       Purchase of foreign financial assets represents a deficit to capital account. (Ex: Bill Gates buying stock in Petro China.) -       Purchase domestic financial assets by foreigners represents a credit to the capital account. (Ex: Cuba purchases in McDonald’s)	-       Foreign currency holding of US states federal reserve system -       The official reserve zero out the balance of payment.

Formulas:

Balance of Trades = Good imports + Good Exports

Balance of Goods and Services = (Good Exports + Service Exports) - (Good Imports + Service Imports)

Current Account = Net Exports + Net Foreign Factor + Net transfers

Capital /Financial Account = Foreign Assets + Our Country Assets