Capital Flows and the Balance of Payments Balancing out Payments from the Rest of the World

Balance of Payments The Current Account and Financial Account always sum to zero. Payments From Payments To Net 1 Sales/purchases of goods and services 2 Factor Income 3 Transfers Current Account (1 + 2 + 3) 4 Official asset purchases/sales 5 Private sales and purchases of assets Financial Account (4 + 5) Total Current Account Financial Account

The Market(s!) for Loanable Funds The Loanable Funds Market in the U.S. The Loanable Funds Market in Japan S1 S1 Real Interest rate, r Real Interest rate, r Capital outflow from the U.S. 6.5% 5.25% Capital inflow to Japan 4% DUS DJ Quantity of loanable funds Quantity of loanable funds Savers look for the best return on their financial assets. What will happen above? Here, the U.S. exports dollars and imports financial assets Japan exports financial assets, and imports dollars.

Underlying Determinants of Capital Inflows How fast is your economy growing? https://www.gfmag.com/global-data/economic-data/countries-highest-gdp-growth-2017 https://money.usnews.com/funds/mutual-funds/rankings/diversified-emerging-mkts What is your country’s private savings rate? What is your country’s public savings (does your government run a budget deficit)?

Let’s Do Some Math! Balance of Payments Balance of Payments on: Goods and Services Current Account Financial Account Payments From Payments To Net 1 Sales/purchases of goods and services 2 Factor Income 3 Transfers Current Account (1 + 2 + 3) 4 Official asset purchases/sales 5 Private sales and purchases of assets Financial Account (4 + 5) Total Current Account 450 600 ? 10 90 ? ? Financial Account ?

Let’s Do Some Math! Balance of Payments Balance of Payments on: Goods and Services Current Account Financial Account Payments From Payments To Net 1 Sales/purchases of goods and services 2 Factor Income 3 Transfers Current Account (1 + 2 + 3) 4 Official asset purchases/sales 5 Private sales and purchases of assets Financial Account (4 + 5) Total Current Account 1000 900 ? 50 100 ? ? Financial Account ?

Where do these fit on the U.S. Balance of Payments accounts? An American college student decides to spend a year studying (and paying tuition) at a university in Australia.

Balance of Payments The Current Account and Financial Account always sum to zero. Payments From Payments To Net 1 Sales/purchases of goods and services (a) (b) 2 Factor Income (c) (d) 3 Transfers (e) (f) Current Account (1 + 2 + 3) 4 Official asset purchases/sales (g) (h) 5 Private sales and purchases of assets (i) (j) Financial Account (4 + 5) Total Current Account Financial Account

Where do these fit on the U.S. Balance of Payments accounts? An American college student decides to spend a year studying (and paying tuition) at a university in Australia. A German telecommunication firm purchases microprocessors from an American firm.

Balance of Payments The Current Account and Financial Account always sum to zero. Payments From Payments To Net 1 Sales/purchases of goods and services (a) (b) 2 Factor Income (c) (d) 3 Transfers (e) (f) Current Account (1 + 2 + 3) 4 Official asset purchases/sales (g) (h) 5 Private sales and purchases of assets (i) (j) Financial Account (4 + 5) Total Current Account Financial Account

Where do these fit on the U.S. Balance of Payments accounts? An American college student decides to spend a year studying (and paying tuition) at a university in Australia. A German telecommunication firm purchases microprocessors from an American firm. An American bank purchases shares of stock in Japanese firms traded on the Tokyo stock exchange.

Balance of Payments The Current Account and Financial Account always sum to zero. Payments From Payments To Net 1 Sales/purchases of goods and services (a) (b) 2 Factor Income (c) (d) 3 Transfers (e) (f) Current Account (1 + 2 + 3) 4 Official asset purchases/sales (g) (h) 5 Private sales and purchases of assets (i) (j) Financial Account (4 + 5) Total Current Account Financial Account

Where do these fit on the U.S. Balance of Payments accounts? An American college student decides to spend a year studying (and paying tuition) at a university in Australia. A German telecommunication firm purchases microprocessors from an American firm. An American bank purchases shares of stock in Japanese firms traded on the Tokyo stock exchange. The central bank of China purchases a U.S. T-bill.

Balance of Payments The Current Account and Financial Account always sum to zero. Payments From Payments To Net 1 Sales/purchases of goods and services (a) (b) 2 Factor Income (c) (d) 3 Transfers (e) (f) Current Account (1 + 2 + 3) 4 Official asset purchases/sales (g) (h) 5 Private sales and purchases of assets (i) (j) Financial Account (4 + 5) Total Current Account Financial Account

Where do these fit on the U.S. Balance of Payments accounts? An American college student decides to spend a year studying (and paying tuition) at a university in Australia. A German telecommunication firm purchases microprocessors from an American firm. An American bank purchases shares of stock in Japanese firms traded on the Tokyo stock exchange. The central bank of China purchases a U.S. T-bill. Wal-mart, an American company, earns profit from its stores in Europe.

Balance of Payments The Current Account and Financial Account always sum to zero. Payments From Payments To Net 1 Sales/purchases of goods and services (a) (b) 2 Factor Income (c) (d) 3 Transfers (e) (f) Current Account (1 + 2 + 3) 4 Official asset purchases/sales (g) (h) 5 Private sales and purchases of assets (i) (j) Financial Account (4 + 5) Total Current Account Financial Account

Where do these fit on the U.S. Balance of Payments accounts? An American college student decides to spend a year studying (and paying tuition) at a university in Australia. A German telecommunication firm purchases microprocessors from an American firm. An American bank purchases shares of stock in Japanese firms traded on the Tokyo stock exchange. The central bank of China purchases a U.S. T-bill. Wal-mart, an American company, earns profit from its stores in Europe. The U.S. exports cars to be sold in Canada.

Balance of Payments The Current Account and Financial Account always sum to zero. Payments From Payments To Net 1 Sales/purchases of goods and services (a) (b) 2 Factor Income (c) (d) 3 Transfers (e) (f) Current Account (1 + 2 + 3) 4 Official asset purchases/sales (g) (h) 5 Private sales and purchases of assets (i) (j) Financial Account (4 + 5) Total Current Account Financial Account

Where do these fit on the U.S. Balance of Payments accounts? An American college student decides to spend a year studying (and paying tuition) at a university in Australia. A German telecommunication firm purchases microprocessors from an American firm. An American bank purchases shares of stock in Japanese firms traded on the Tokyo stock exchange. The central bank of China purchases a U.S. T-bill. Wal-mart, an American company, earns profit from its stores in Europe. The U.S. exports cars to be sold in Canada. Honda, a Japanese company, earns a profit from its Accord factory in Indiana.

Balance of Payments The Current Account and Financial Account always sum to zero. Payments From Payments To Net 1 Sales/purchases of goods and services (a) (b) 2 Factor Income (c) (d) 3 Transfers (e) (f) Current Account (1 + 2 + 3) 4 Official asset purchases/sales (g) (h) 5 Private sales and purchases of assets (i) (j) Financial Account (4 + 5) Total Current Account Financial Account

Where do these fit on the U.S. Balance of Payments accounts? An American college student decides to spend a year studying (and paying tuition) at a university in Australia. A German telecommunication firm purchases microprocessors from an American firm. An American bank purchases shares of stock in Japanese firms traded on the Tokyo stock exchange. The central bank of China purchases a U.S. T-bill. Wal-mart, an American company, earns profit from its stores in Europe. The U.S. exports cars to be sold in Canada. Honda, a Japanese company, earns a profit from its Accord factory in Indiana. Coca-Cola buys a factory in Mexico.

Balance of Payments The Current Account and Financial Account always sum to zero. Payments From Payments To Net 1 Sales/purchases of goods and services (a) (b) 2 Factor Income (c) (d) 3 Transfers (e) (f) Current Account (1 + 2 + 3) 4 Official asset purchases/sales (g) (h) 5 Private sales and purchases of assets (i) (j) Financial Account (4 + 5) Total Current Account Financial Account

Where do these fit on the U.S. Balance of Payments accounts? An American college student decides to spend a year studying (and paying tuition) at a university in Australia. A German telecommunication firm purchases microprocessors from an American firm. An American bank purchases shares of stock in Japanese firms traded on the Tokyo stock exchange. The central bank of China purchases a U.S. T-bill. Wal-mart, an American company, earns profit from its stores in Europe. The U.S. exports cars to be sold in Canada. Honda, a Japanese company, earns a profit from its Accord factory in Indiana. Coca-Cola buys a factory in Mexico. The U.S. imports oil from Venezuela.

Balance of Payments The Current Account and Financial Account always sum to zero. Payments From Payments To Net 1 Sales/purchases of goods and services (a) (b) 2 Factor Income (c) (d) 3 Transfers (e) (f) Current Account (1 + 2 + 3) 4 Official asset purchases/sales (g) (h) 5 Private sales and purchases of assets (i) (j) Financial Account (4 + 5) Total Current Account Financial Account

Where do these fit on the U.S. Balance of Payments accounts? An American college student decides to spend a year studying (and paying tuition) at a university in Australia. A German telecommunication firm purchases microprocessors from an American firm. An American bank purchases shares of stock in Japanese firms traded on the Tokyo stock exchange. The central bank of China purchases a U.S. T-bill. Wal-mart, an American company, earns profit from its stores in Europe. The U.S. exports cars to be sold in Canada. Honda, a Japanese company, earns a profit from its Accord factory in Indiana. Coca-Cola buys a factory in Mexico. The U.S. imports oil from Venezuela. A Brazilian company buys an apartment building in Boston.

Balance of Payments The Current Account and Financial Account always sum to zero. Payments From Payments To Net 1 Sales/purchases of goods and services (a) (b) 2 Factor Income (c) (d) 3 Transfers (e) (f) Current Account (1 + 2 + 3) 4 Official asset purchases/sales (g) (h) 5 Private sales and purchases of assets (i) (j) Financial Account (4 + 5) Total Current Account Financial Account