Unit VII: BOP

Unit VII: AP Macroeconomics: The Balance Of Payments: 

Balance of Payments: measure of money inflows (credits) and outflows (debits) between the U.S. And the rest of the world. 

Balance of Accounts is divided into 3 parts: 

1. Current Account

-balance of trade + our net invest + our net transfers 

-every transaction in the balance of payments is recorded twice in accordance with standard accounting practice.

- what goes out should come back equal to zero

2. Capital/Financial Account

-the balance of capital ownership

-includes purchase of both real and financial assets

-direct investment in the united states is a credit to the capital account

-direct investment by US firms/individuals in a foreign country are debits to the capital account

-purchase of foreign financial assets represents a debit to the capital account.

-purchase of domestic financial assets by the foreigners represents a credit to the capital account

Relationship between current and capital 

account:

-they should zero each other out

-if current account is negative then capital account should have a positive balance

- foreign purchases of US assets + US purchases of assets abroad

3. Official Reserves Account  

-foreign currency holdings of the united states federal reserve system

-when there is a balance of payments surplus the fed accumulates foreign currency and debits the balance or payments

-when there is a balance of payments deficit the fed depletes its reserves of foreign currency and credits the balance payments

-official reserves zero out the balance of payments

current account + capital account

Double Entry Book Keeping: 

Every transaction in the balance of payments is recorded twice in accordance with stranded accounting practice.

Theoretically, The balance payment should always equal zero. 

Balance of trade:

-exports - imports = balance of trade

Balance of trade:

-goods and services exports - goods and services imports

-trade deficit or trade surplus

-imports > exports =deficit

-exports < imports =surplus

-goods exports + goods imports

Net foreign income:

-income earned by US owned foreign assets - income paid to foreign held US assets

Net Transfers:

Ex: people work here and send money to their country

Active v. Passive Official Reserves:

-the united states is passive in its use of official reserves. It does not seek to manipulate the dollar exchange rate.

-the people's republic of china is active in its use of official reserves. It actively buys and sells dollars in order to maintain a steady exchange rate with the united states

Goods and Services:

-goods imports + service imports