1. Balance of Payments Open Market Economies

2. NX < 0 NX > 0 Trade Deficit Trade Surplus Red = Trade Deficit (more imports than exports) Blue = Trade Surplus (more exports than imports) Grey = no data GDP = C + I + G + NX

3. Current Account Current Account = NX or (X-M) –Most common measure of trade deficit/surplus –Includes goods, services & investment income Visible Balance Invisible Balance: Investment income: payments for financial services, shipping and tourism, interest payments on investments (bond interest stock dividends, etc.… Imports & exports: payments/receipts from the import/export of tangible goods (cars, food, textiles,…)

4. Financial Account –Foreign purchase of US assets - US purchase of foreign assets –i.e. financial capital (savings) flowing between countries Includes items such as: Real estate, private companies, Gov’t Bonds, Stocks, etc….

5. Current + Financial = ZERO You buy a TV made in China China has U.S. dollars Current account deficit 2 options Buy U.S. imports Current account surplus for USA Which offsets deficit Buy U.S. Bonds/Stocks with $ or hold as currency Financial account surplus If one is positive the other is negative. They generally sum to ZERO!

6. Balance of Payments Current Account (NX) –Export-Import & Investment Income Financial Account (formerly called capital account) –Foreign purchase of US assets – U.S. purchase of foreign assets –Example: Capital Surplus = Capital flows into US Official Reserves –Fed holds quantities of foreign currency called reserves –Used to offset discrepancy in current account vs. capital account If one is positive the other is negative. They generally sum to ZERO! If both accounts do Not sum to zero, reserves are used to Offset minor difference

7. Balance of Payments Reading

8. Financial Account: Capital Outflow capital outflow when “savings” is leaving a country Example: A U.S. resident buys stock in a European Corporation Capital Flows out of U.S. European Stock Market U.S. Investor China’s Central Bank U.S. Gov’t Bonds Capital Flows into U.S.

9. BOP Deficit or Surplus Current Account + Financial Account < 0 Current Account + Financial Account > 0 Balance of Payments Deficit Balance of Payments Surplus Official Reserves are used to offset any BOP deficit or surplus Usually it is only a minor difference as the current account and financial account by definition cancel each other out.

10. 2008 Free Response

11. The Internationalization of U.S. Economy Percent of GDP 0 5 10 15 1950 51960196519701975198019901985200020051995 Imports Exports