Unit 7 notes

Unit 7 -international trade

Balance of Payments

-measure of money inflows and outflows between the United States and the Rest of the World (ROW)

-inflows are referred to as credits

-outflows are referred to as Debits

-the balance of payments are divided into 3 accounts

  -current account

  -capital/financial account

  -official reserve accounts

Double entry bookkeeping

-every transaction in the balance of payments is recorded twice in accordance with standard accounting practice

EX: U.S. Manufacturer, John Deere exports $50 million worth of farm equipment to Ireland

  -a credit of 50mil to the current account (-50 million worth of farm equipment or physical assets)

  -a debit of 50 mil to the capital/financial account (+50 million worth of farm equipment or physical assets)

-balance of trade

  -exports of goods/services - imports of goods/services

-export create a credit to the balance of payments

-imports create a debit to the balance payments

-Net foreign income

  -income earned by US owned foreign assets - income paid to foreign held US assets

Ex: interest payments on US owned Brazillian bonds - interest payments on German owned US Treasury bonds

-Net Transfers (tend to be unilateral)

-foreign aid -> a debit to the current account

EX: Mexican migrant workers send money to family in Mexico

Capital/Financial account

-the balance of capital ownership

-includes the purchase of both team and financial assets

-direct investment in the US is a credit to the capital account

  -EX: the toyota factory in San Antonio

-Direct investment by US firms/individuals in a foreign country are debits to the capital account

  EX: the Intel factory in San Jose, California

-purchase of foreign financial assets represents a debit to the capital account

Ex:warren buffet buys stock in petrochina

-Purchase of domestic financial assets by foreigners represents a credit to the capital account

  -the United Arab Emirates sovereign wealth fund purchases a large stake in the NASDAQ

-Relationship between current and capital account

  -remember double entry bookkeeping?

-the current account and the capital account should zero each other out.