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.

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.