1. BALANCE OF PAYMENTS ACCOUNTS UNIT 8: INTERNATIONAL TRADE AND FINANCE OBJ: STATE THE IMPLICATIONS OF HAVING A CURRENT ACCOUNT SURPLUS/DEFICIT BY DISCUSSING DIFFERENT SCENARIOS Homework: 1.Economic Literacy Response #3 (due tomorrow) 2.Mod. 41 Notes (due Friday)

2. INTERNATIONAL TRADE ROUTES

3. FOREX (FOREIGN EXCHANGE MARKET)

4. THE BALANCE OF PAYMENTS ACCOUNTS Form of calculating international transactions of a nation US sale of airplanes to Canada (goods/services) Purchase of German stock (financial assets) Paychecks immigrant workers send back home (transfer payments) Interest payment on a loan issued to Swiss firm (factor payment) Payments for use of land, labor, capital, entrepreneurship

5. CATEGORIES OF BALANCE OF PAYMENTS 1.Current Account: transactions that do not create a future liability  Wheat, cars, oil, 2.Financial Account: transactions that create a liability (assets)  Currency, securities, factories All flow into a country is a credit (+) All flow out of a country is a debit (−) Current Account + Financial Account = 0 Why? Total sources of cash must equal total uses of cash! If you import more goods/services than you export (current account deficit) then you must finance those purchases by borrowing (financial account surplus) Think: If more goods/services coming in (CA surplus), assets must be going out (FA deficit) If more goods/services going out (CA deficit), assets must be coming in (FA surplus)

6. FINANCIAL ACCOUNT = CAPITAL INFLOWS/OUTFLOWS (INVESTMENT)  Think of financial accounts as domestic/foreign savings that can be used for investment  Therefore, financial accounts = supply of loanable funds  Therefore, a financial account surplus = increased supply of loanable funds! This increase in the loanable funds supply is for that nation For example: Assuming only 2 nations in the world: Econoland and Farmville. Econoland currently exports $150 worth of toasters and imports $100 worth of bread. What then must be the state of Econoland’s financial account? How does this impact loanable funds market of Farmville? Econoland: running a current account surplus = financial account deficit Foreign currency used to purchase Econoland toasters had to come from somewhere…Farmville borrows to finance Farmville: loanable funds supply will increase (decreasing real interest rates) due to the financial account deficit of Econoland…outflows of investment to Farmville

7. SCENARIOS Discuss the following balance of payments accounts scenarios with a partner: 1.Which balance of payments accounts would be impacted by the following events? Identify who is credited and who is debited. a. Boeing, a US based company, sells a newly build airplane to China. b. Chinese investors buy stock in Boeing from Americans. 2. If Venezuela exports $100 B worth of crude oil and imports $200 B worth of consumer goods, explain the state of Venezuela’s financial account. 3. How would a decrease in real income in the United States affect the U.S. current account balance? Explain.

8. SCENARIO ANSWERS 1. a. Current account (US credit, China debit) b. Financial account (US credit, China debit) 2. Venezuela is running a current account deficit, therefore they must have a financial account surplus. Further, they are having loanable funds supplied to their loanable funds market by the foreign inflow of capital to Venezuela. 3. Households slow their purchase of foreign goods/services, imports fall = current account surplus (export more than import).