Balance of Payments Part II Equating Savings Investment
Balance of Payments Part II Equating Savings & 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
Equality of NX & Capital Account A country can only consume more than it produces If it borrows from abroad (current account deficit) (capital account surplus) • 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.
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
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 U. S. Gov’t Bonds $ $ European Stock Market China’s Central Bank
Summary. . .
- Slides: 6