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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