Unit 7: Balance of Payment

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 Balance of Payment: Measure of money inflows and outflows between the US and the rest of the world
  • Inflows are known as credits
  • Outflows are known as debits
The balance of payments is divided into three accounts:
  • Current Account
  • Capital/Financial Account
  • Official Reserves
Current Account:
  • Balance of Trade or Net Exports: Exports - Imports; Exports are credit/assets. Imports are debits/liabilities. 
  • Net Foreign Income or Net Investment: Income earned by US owned foreign assets; Income paid to foreign held US assets
  • Net Transfers or Foreign Aid: Humanitarian efforts; a foreigner in the US sends money that they gross here to their home country
Capital/Financial Account: 
  • The balance of capital ownership
  • It includes the purchases of both real 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 Dell computer factory in Costa Rica
  • Purchase of foreign financial assets represents a debit to the capital account
  • Ex: Bill Gates buys stock in petrol China
  • Purchase of domestic financial assets by foreigners represents a credit to the capital account
  • Ex: Venezuela purchases a large stake in Wal-Mart
Current and Capital Account should zero each other out

Official Reserves: 
  • The foreign currency holdings of the US Federal Reserve Bank
  • The official reserves should zero out the balance of payment

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