Transcript After Balance of Payments HANDOUT

Balance of Payments
• Current Account
(NX)
– Export-Import & Investment Income
Sum of all 3
must be zero
• 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
The Dollar Market
Event:
U.S. invests more in India
Market for Dollars
S1
Rupee Price
of a Dollar
--------------
--------------
P1
S2
E1
Q1
D1
Qty of Dollars
House of
Money
GDP = C + I + G + NX
Price
Level
LRAS1
AD1
Real
GDP
SRAS1
Economic Situation:
Economy at Full Employment
GDP = C + I + G + NX
Nominal
Interest
Rate
i1
MS1
Price
Level
LRAS1
SRAS1
Affects AD
--------MD
Qty of $
AD1
Real
GDP
Balance of Payments
Open Market Economies
Current Account = Capital Account
• You sell software to Japan
• Current Account
• You get 10,000 Yen
• What happens next: IT DEPENDS on what you do next:
• If you keep Yen
=> you have purchased Yen
or
buy Japanese stocks
Capital Account
• If you buy an import
=> Current Account
• Exchange Yen for dollars => it depends what Bank does with Yen
BOP Deficit or Surplus
• Current Account
– Import or Export payments on Goods & Services
– Investment Income in or out of USA
• Capital Account
– Foreign purchase of US assets - US purchase of foreign assets
Current Account + Capital Account < 0
Current Account + Capital Account > 0
Balance of Payments Deficit
Balance of Payments Surplus