Balance of Payments Current Account NX ExportImport Investment

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 S 1 Rupee Price of a Dollar -------------- P 1 S 2 E 1 Q 1 D 1 Qty of Dollars

GDP = C + I + G + NX

Economic Situation: Economy at Full Employment GDP = C + I + G + NX Nominal Interest Rate i 1 MS 1 Price Level LRAS 1 SRAS 1 Affects AD ----MD Qty of $ AD 1 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