Balance of Payments The sum total of all financial transactions that take place between one nation’s residents and another nations residents.

A. The U.S. Balance of Payments Statement 1. A report by the Bureau of labor statistics which tracks: a. Payments to the United States b. Payments from the United States 2. Two accounts on the U.S. Balance of Payments Statement: a. The Current Account b. The Capital / Financial Account

B. The Current Account - An account that summarizes trade primarily in currently produced and ready to use goods and services 1. Examples: a. Cars b. Clothes c. Financial Advice

B. The Current Account 2. Items on the Current Account a. Exports - exports of goods and services are entered in the current account with a plus sign because they result in payments to the US. b. Imports - Imports of goods and services are entered in the current account with a minus sign because they result in payments from the US.

B. The Current Account c. The Balance on Goods and Services = Exports - Imports (aka Net Exports Xn) 1.) Trade Surplus (aka a favorable balance of trade) - When US exports are greater than US imports and the balance on goods and services is positive. 2.) Trade Deficit (aka an unfavorable balance of trade) - When US imports are greater than US exports and the balance on goods and services is negative.

B. The Current Account d. Net Investment Income - Income earned from American owned financial and capital investments that operate in other countries minus income earned from foreign owned financial and capital investments that operate here. 1.) Profits from Disneyland, Paris (which is owned by US based Walt Disney Company) would be added to Net Investment Income. 2.) Profits from a Japanese auto company's facilities operating in the US would be subtracted from Net Investment Income. 3.) Dividends from ownership of a German based company's stock held by an American would be …?

added to Net Investment Income It’s money flowing from the German company to an American.

B. The Current Account e. Net Transfers - Money "given" to Americans by foreigners minus money "given" to foreigners by Americans. 1.) This includes things such as foreign aid or money sent to families back home by immigrants (called "remittances")

B. The Current Account f. Balance on the Current Account - The sum total of all of the previous items on the current account. 1.) A positive balance on the current account means that more goods and services (in monetary or dollar terms) flowed out of the US than flowed in from foreign countries. a.) We exported more than we imported. 2.) A negative balance on the current account means that more goods and services (in monetary or dollar terms) flowed in to the US than flowed out to foreign countries. a.) We imported more than we exported.

C. The Current Account – Items 1 through 10

D. The Capital / Financial Account - An account that summarizes trade in assets. 1. Real Assets - Items of financial value that are tangible like gold, land, or capital of any kind like factories or office buildings. 2. Financial Assets - Items that are not tangible whose financial value is represented on paper such as stocks, bonds, or currency.

D. The Capital / Financial Account 3. Items in the Capital / Financial Account a. The Capital Account - The amount of debt that foreigners forgave to Americans minus the amount of debt that Americans forgave to foreigners. 1.) This is an asset transaction in that the creditor essentially gives the borrower the IOU which is a financial asset.

D. The Capital / Financial Account 2.) Note - "Capital" is a terrible name to use for this account since we are always telling you that financial assets like money are not capital because financial assets do not produce anything. Only machinery does. Nevertheless, what do they call the account that keeps track of the handing over of a purely financial asset like an IOU? The Capital Account. Go figure.

D. The Capital / Financial Account b. The Financial Account - Real and financial assets bought by foreigners from Americans minus real and financial assets bought from foreigners by Americans.

D. The Capital / Financial Account c. Balance on the Capital / Account - The sum total of the capital account and the financial account. 1.) A positive balance on the capital / financial account means that more assets flowed out of the US than flowed in from foreign countries. 2.) A negative balance on the capital / financial account means that more assets flowed in to the US than flowed out to foreign countries.

E. The Capital / Financial Account – Items 11 through 15

F. Zeroing out the Balance of Payments. 1. The sum total of the current account and the Capital / Financial Account must add up to zero. a.) All currently produced goods and services in the Current Account must be paid for with financial assets from the Capital / Financial Account. b.) If the United States imports $500 worth of goods from Japan (- $500), it must pay for them by "exporting" currency, a financial asset, from the Capital / Financial Account (+$500).

F. Zeroing out the Balance of Payments. c.) So deficits in the current account lead to surpluses in the Capital / Financial account. d.). Surpluses in the current account led to deficits in the Capital / Financial account.

F. Zeroing out the Balance of Payments. 2. The Official Reserves Account a.) The US Federal Reserve and the central banks of other nations have supplies of foreign currency called, "official reserves." b.) If there are insufficient funds in the Capital / Financial account to balance out with the current account (a balance of payments deficit), the Fed supplies funds to the foreign exchange so that the accounts can zero out.

F. Zeroing out the Balance of Payments. c.) If there is a surplus of funds in the Capital / Financial account (a balance of payments surplus) the Fed uses them to replenish its supply of official reserves. d.) Because of this, some resources refer to the Balance of Payments as consisting of 3 accounts instead of two. 1.) The Current Account 2.) The Capital / Financial Account 3.) The Official Reserves Account.