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. 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.