Capital Flows and Balance of Payments Chapter 19-1

Capital Flows And The Balance Of Payments  A country’s balance of payments accounts summarize its transactions with the rest of the world.  The balance of payments on current account includes the balance of payments on goods and services together with balances on factor income and transfers.  The merchandise trade balance is a frequently-cited component of the balance of payments on goods and services.  The balance of payments on financial account measures capital flows. By definition, sum of the balance of payments on current account plus the balance of payments on financial account is zero.

Balance of Payments  A country’s balance of payments accounts summarize its transactions with the rest of the world.

Balance of Payment v. Trade Balance  Balance of Payments on Goods and Services:  Balance of Payments on Goods and Services: Exports minus Imports (X-IM)  Merchandise Trade balanceTrade Balance:  Merchandise Trade balance or Trade Balance:Difference between export and import of Goods.  Can you see the difference?

Current Account  Balance of Payment on Current Account, or Current Account:  Balance of Payment on Current Account, or Current Account: balance of payment on goods and services + Net Transfer payments+ Factor Income

Do you understand these?  Balance of Payments:  Transfer payment:  Factor Income: WRIP

The U.S. Balance of Payments on Current Account, 2004

Financial Accounts  Balance of Payment on Financial Accounts:  Balance of Payment on Financial Accounts: difference between sales of assets to foreigners and purchase of assets from foreigners during a given period.

The U.S. Balance of Payments on Financial Account, 2004

CA= - FA

The Balance of Payments

The Loanable Funds Model - Revisited

Loanable Funds Markets in Two Countries

International Capital Flows