Download Balance of Payments Short

Balance of Payments
Open Market Economies
NX < 0
Trade Deficit
NX > 0
Trade Surplus
GDP = C + I + G + NX
Red = Trade Deficit
(more imports than exports)
Blue = Trade Surplus (more exports than imports)
Grey = no data
Current Account
• Current Account = NX or (X-M)
– Most common measure of trade deficit/surplus
– Includes goods, services & investment income
• Visible Balance
Imports & exports: payments/receipts from the import/export of
tangible goods (cars, food, textiles,…)
• Invisible Balance:
Investment income: payments for financial services, shipping and
tourism, interest payments on investments (bond interest stock dividends, etc.…
Financial Account
• Financial Account
– Foreign purchase of US assets - US purchase of foreign assets
– i.e. financial capital (savings) flowing between countries
Includes items such as:
Real estate, private companies, Gov’t Bonds, Stocks, etc….
Current + Financial = ZERO
If one is positive the other is negative. They generally sum to ZERO!
You buy a TV made in China
China has U.S. dollars
2 options
Current account deficit
Buy U.S. imports
Current account surplus for USA
Which offsets deficit
Buy U.S. Bonds/Stocks with $ or
hold as currency
Financial account surplus
Balance of Payments
• Current Account
If one is positive
the other is negative.
They generally sum to
ZERO!
(NX)
– Export-Import & Investment Income
• Financial Account
(formerly called capital account)
– Foreign purchase of US assets – U.S. purchase of foreign assets
– Example: Capital Surplus = Capital flows into US
If both accounts do
Not sum to zero,
reserves are used to
Offset minor
difference
• Official Reserves
– Fed holds quantities of foreign currency called reserves
– Used to offset discrepancy in current account vs. capital account
Balance of Payments Reading
Financial Account:
Capital Outflow
• capital outflow when “savings” is leaving a country
• Example: A U.S. resident buys stock in a European Corporation
U.S.
Investor
U.S.
Gov’t
Bonds
Capital Flows out of U.S.
Capital Flows into U.S.
European
Stock
Market
China’s
Central
Bank
BOP Deficit or Surplus
Current Account + Financial Account < 0
Current Account + Financial Account > 0
Balance of Payments Deficit
Balance of Payments Surplus
Official Reserves are used to offset any BOP deficit or surplus
Usually it is only a minor difference as the current account and financial account
by definition cancel each other out.
2008 Free Response
The Internationalization of U.S. Economy
Percent
of GDP
15
Imports
10
Exports
5
0
1950 1955
1960 1965 1970 1975 1980 1985 1990 1995 2000
2005