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Download After Balance of Payments HANDOUT
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Balance of Payments • Current Account (NX) – Export-Import & Investment Income Sum of all 3 must be zero • Capital Account – Foreign purchase of US assets – U.S. purchase of foreign assets – Example: Capital Surplus = Capital flows into US • Official Reserves – Fed holds quantities of foreign currency called reserves – Used to offset discrepancy in current account vs. capital account The Dollar Market Event: U.S. invests more in India Market for Dollars S1 Rupee Price of a Dollar -------------- -------------- P1 S2 E1 Q1 D1 Qty of Dollars House of Money GDP = C + I + G + NX Price Level LRAS1 AD1 Real GDP SRAS1 Economic Situation: Economy at Full Employment GDP = C + I + G + NX Nominal Interest Rate i1 MS1 Price Level LRAS1 SRAS1 Affects AD --------MD Qty of $ AD1 Real GDP Balance of Payments Open Market Economies Current Account = Capital Account • You sell software to Japan • Current Account • You get 10,000 Yen • What happens next: IT DEPENDS on what you do next: • If you keep Yen => you have purchased Yen or buy Japanese stocks Capital Account • If you buy an import => Current Account • Exchange Yen for dollars => it depends what Bank does with Yen BOP Deficit or Surplus • Current Account – Import or Export payments on Goods & Services – Investment Income in or out of USA • Capital Account – Foreign purchase of US assets - US purchase of foreign assets Current Account + Capital Account < 0 Current Account + Capital Account > 0 Balance of Payments Deficit Balance of Payments Surplus
