-measure of money inflows and outflows between the US and the Rest of the World (ROW)
+inflows are referred to as CREDITS
+out flows are referred to as DEBITS
-the balance of payments is divided by 3 accounts
1. current account
2. capital/ financial accounts
3. official reserves accounts
Current Accounts
- balance of trade or net exports
-net foreign income
-net transfers (tend to be unilateral)
Capital/ Financial Accounts
- the balance of capital ownership
-includes the purchase of both real and financial assets
-direct investment in the US is a credit to the capital account
-direct investment by US Firms/ individuals in foreign country are debits to capital accounts
-purchase of foreign financial assets represents a debit to a capital account
-purchase of domestic financial assets by foreigners represents a credit to the capital accounts
***the current account and the capital account should zero each other out***
Official Reserves
-foreign currency holdings of US Federal Reserve System
-when there is a balance of payments surplus the FED accumulates foreign currency and debits balance of payments
-when there is a balance of payments deficit FED depletes its reserves of foreign currency and credits balance of payments
Active US passive official reserves
-the US is passive in its use of official reserves
Keep in mind that the main component of a current account is trade balance. If a country has a current account deficit, they probably have a negative trade balance. Economies are not balanced if they have a current account deficit.
ReplyDeleteGreat blog! It's very organized and easy to follow. Though you could have elaborated on how the economy is managing its finances and the step it takes towards it. Or that when there is a balance of payment deficits the fed credits the balane of payments. but all in ll you have a nice blog!(✌ﾟ∀ﾟ)☞
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