Unit 7 notes

Balance of Payments
Measure of money inflows and outflows between the U.S. And rest of the works (ROW)
inflow = credit
outflows = debits
3 Acct balance is divided into
Current Acct
Capital Acct
Official Reserves
Double Entry Bookkeeping: every transaction in the balance of payments is recorded twice in accordance w/standard accounting practice.
Balance of Trade
Export of goods/service - imports of goods/services
Export create credit to balance of payments
Imports create debit to balance of payments
Net Foreign income
Income earned by US owned foreign assets - income paid to foreign held US assets.
Ex. interest payments to US owned Brazilian bonds - interest payment on German owned US treasury bonds.
Net transfer (tend to be unilateral)
Foreign aid > a debit to the current acct
Ex. Mexican migrant workers send money to family in mexico.
Capital/Financial accounts
Includes the purchase of both real and financial assets
Direct investment in US is a credit to capital account
Ex. Toyota factory in San Antonio
Direct invest by US firms/individual in a foreign country are debit to the capital account.
Ex. Intel factory in San Jose, Costa Rica
Purchase of foreign financial assets represent a debit to capital account.
The current account & capital account should zero each to her out.
If current account has a negative balance (deficit) then the capital account has a positive balance (surplus)
Official Reserve
foreign currency holding of the United States Federal Reserve System
When there is a balance of payments surplus the FED accumulates foreign currency and debits the balance of payments.
Active vs. Passive
the US is passive in its use of official reserves because our exchange rate stays the same
the people's republic of china is active in its use of official reserves.
Actively buys and sells dollar in order to maintain a steady exchange with the US