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

2. 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 ( ) 4
Official asset purchases/sales 5
Private sales and purchases of assets
Financial Account
(4 + 5)
Total
Current Account
Financial Account

3. 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.

4. Underlying Determinants of Capital Inflows
How fast is your economy growing?
What is your country’s private savings rate?
What is your country’s public savings (does your government run a budget deficit)?

5. 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 ( ) 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 ?

6. 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 ( ) 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 ?

7. 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.

8. 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 ( ) 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

9. 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.

10. 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 ( ) 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

11. 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.

12. 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 ( ) 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

13. 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.

14. 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 ( ) 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

15. 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.

16. 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 ( ) 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

17. 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.

18. 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 ( ) 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

19. 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.

20. 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 ( ) 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

21. 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.

22. 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 ( ) 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

23. 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.

24. 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 ( ) 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

25. 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.

26. 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 ( ) 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