Flow of Capital: Net Foreign Investment

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Presentation transcript:

Flow of Capital: Net Foreign Investment Purchase of foreign assets by domestic residents minus purchase of domestic assets by foreigners Think of Nx – but now concerned with $ amounts and how the flow of $ and value of the asset that goes in/out of the country – so will include the purchase/sale of non physical items (stocks/bonds etc..) or the creation of a business in another country US citizen buys Japanese car = flow of goods US citizen buy stock in Japanese car co. = flow of capital

Ken (US) buys stock in London Stock Exch. = increase the US NFI Jon (UK) buys stock in NYSE = decrease the US NFI

Balance of Payments : When American citizens and firms exchange goods and services with foreign consumers and firms, payments are sent back and forth through major banks around the world. ………= A country’s balance of payments accounts : record its international trading, borrowing, and lending. = THE BALANCE B/W ALL PAYMENTS THE U.S. RECEIVES FROM FOREIGNERS and ALL PAYMENTS MADE TO FOREIGNERS

Current account shows current import and export payments of both goods and services. It also reflects investment income sent to foreign investors and investment income received by U.S. citizens who invest abroad. If the balance on a current account is -$20 million = deficit which tells us that the US sent more American dollars abroad than foreign currency received in current transactions

Capital account records foreign investment in the US minus US investment abroad. When a nation buys a foreign firm, real estate, or financial asset (bonds) of another nation. A surplus balance of (+ $11 billion) tells us that there was more foreign capital investment in the US than there was US investment abroad.

Capital flow - Capital flight -

Official RESERVES Account The Federal Reserve holds quantities of foreign currency called official reserves. US official reserves are the government’s holdings of foreign currency. If US official reserves increase, the official reserve (settlements) account balance is negative. The reason is; that holding foreign money is like investing abroad

US imports = demand for foreign currency and a supply of US dollars US exports = supply of foreign currency and a demand for US dollars Current + Capital < 0 , balance of payment deficit Current + Capital > 0 , balance of payment surplus