Download 5. CH 29 NFI and B O P notes

Flow of Capital: Net Foreign Investment
• Purchase of foreign assets by domestic
residents minus purchase of domestic assets
by foreigners
• Think of Nx – but now concerned with $
amounts and how the flow of $ and value of
the asset that goes in/out of the country – so
will include the purchase/sale of non physical
items (stocks/bonds etc..) or the creation of a
business in another country
• US citizen buys Japanese car = flow of goods
• US citizen buy stock in Japanese car co. = flow
of capital
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Ken (US) buys stock in London Stock Exch.
= increase the US NFI
Jon (UK) buys stock in NYSE
= decrease the US NFI
Balance of Payments :
• When American citizens and firms exchange
goods and services with foreign consumers and
firms, payments are sent back and forth through
major banks around the world. ………=
• A country’s balance of payments accounts :
record its international trading, borrowing, and
lending.
• = THE BALANCE B/W ALL PAYMENTS THE U.S.
RECEIVES FROM FOREIGNERS and ALL PAYMENTS
MADE TO FOREIGNERS
Current account
• shows current import and export payments of
both goods and services.
• It also reflects investment income sent to foreign
investors and investment income received by U.S.
citizens who invest abroad.
• If the balance on a current account is -$20
million
• = deficit which tells us that the US sent more
American dollars abroad than foreign currency
received in current transactions
Capital account
• records foreign investment in the US minus US
investment abroad.
• When a nation buys a foreign firm, real estate,
or financial asset (bonds) of another nation.
• A surplus balance of (+ $11 billion) tells us that
there was more foreign capital investment in
the US than there was US investment abroad.
• Capital flow • Capital flight -
Official RESERVES Account
• The Federal Reserve holds quantities of
foreign currency called official reserves.
• US official reserves are the government’s
holdings of foreign currency. If US official
reserves increase, the official reserve
(settlements) account balance is negative.
The reason is; that holding foreign money is
like investing abroad
• US imports = demand for foreign currency and
a supply of US dollars
• US exports = supply of foreign currency and a
demand for US dollars
• Current + Capital < 0 , balance of payment
deficit
• Current + Capital > 0 , balance of payment
surplus