Balance of Payments Part II

1. Balance of PaymentsPart II Equating Savings & Investment

2. Sum of all 3 must be zero Balance of Payments • Current Account (NX) • Export-Import & Investment Income • 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

3. Equality of NX & Capital Account A country can only consume more than it produces (current account deficit) • For an economy as a whole, Current Account & Capital Account must balance each other • This holds true because every transaction that affects one side must also affect the other side by the same amount. If it borrows from abroad (capital account surplus)

4. 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 stocksCapital Account • If you buy an import => Current Account • Exchange Yen for dollars => itdepends what Bank does with Yen

5. Net Capital Outflow • Net capital outflow (NCO) the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners (NCO = NX) • Example: A U.S. resident buys stock in a European Corporation U.S. Investor European Stock Market $ U.S. Gov’t Bonds China’s Central Bank $

6. Summary . . . . .