The balance of payment (Unit 7)

The balance of payment

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

• Inflows ---> CREDITS
• outflows ---> DEBITS

The balance of payments is divided into 3 accounts
      1. current account
      2. capital/ financial accounts
      3. official reserves accounts

Current Accounts

• Balance of trade or net exports
• Net foreign income
• Net transfers (tend to be unilateral)

Capital/ Financial Accounts

•  The balance of capital ownership
•  Includes the purchase of both real and financial assets
• Direct investment in the US is a credit to the capital account
• Direct investment by US Firms/ individuals in foreign country are debits to capital accounts
• Purchase of foreign financial assets represents a debit to a capital account
• Purchase of domestic financial assets by foreigners represents a credit to the capital accounts

Official Reserves 

• Foreign currency holdings of US Federal Reserve System
• When there is a balance of payments surplus the FED accumulates foreign currency and debits balance of payments
• When there is a balance of payments deficit FED depletes its reserves of foreign currency and credits balance of payments

Active VS Passive Official Reserves

• The US is passive in its use of official reserves

Formulas

Balance of Trade

Good Exports + Goods Imports

Balance of Goods and Services

Goods Exports + Service Exports   +   Goods imports + Service Imports

Current Account

Balance on goods and services + Net Investments and Net Transfers

Capital Account

Foreign Purchases + Domestic Purchases