Unit 7

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  • Measure of money in flows and out flows between the US and the rest of the world
  • In flows referred to as credits
  • Out flows referred to as debit
  • The balance of payments is divided into 3 accounts
    • 1. Current account
      • Balance of trade or net exports
        • Exports is known as a credit or asset. Debit is known as a debit or liability.
      • Net foreign income or net investment
        • Income earned by US owned foreign assets
        • Encompasses income paid to foreign held US assets
      • Net transfers
        • Foreign aid
          • ex. US giving money to another country for weather related disaster or famine
          • ex. A worker sending money back home to family
        • Tend to be unilateral
    • 2. Capital/financial account
      • Balance of capital ownership includes the purchase of real and financial assets
        • Real assets are real estate. Financial assets are stocks and bonds. 
      • Direct investment in the US is a credit to the capital account
        • ex. Toyota factory in San Antonio
      • Direct investment by US firms/individuals in a foreign country or debits to the capital account
        • ex. Dell (American owned) computer factory in Costa Rica
      • Purchase of foreign financial assets represents a debit to the capital account
        • ex. Bill Gates buys stock in Petro-China
      • Purchase of domestic financial assets by foreigners represents a credit to the capital account
        • ex. Venezuela buys stock in McDonald's
    • 3. Official reserves
      • Capital and current account must zero each other out
      • Foreign currency holdings of the US Federal Reserve System 
      • The official reserves should zero out the balance of payments
  • Balance of Trades
    • Goods exports + goods imports
  • Balance on goods and services
    • Goods exports + services exports - goods imports + services imports
  • Balance on current accounts
    • Balance of trades + net investments + net transfers
  • Capital Account
    • Foreign purchase of assets + the US purchase of assets abroad

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