Balance of Payments

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Balance of Payments


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Balance of Payments : Balance of Payments “It all comes out in the wash”

Balance of Payments : Balance of Payments A nations balance of payments is the sum of ALL the transactions that take place between the residents of a country and the residents of ALL other countries. Those transactions include exports and imports of goods and services, tourist expenditures, interest and dividends received or paid on investments, and purchases and sales of financial or real (physical) assets at home and abroad

Balance of Payments : Balance of Payments The Balance of Payments is measured by the Bureau of Economic Analysis (an division of the Department of Commerce) There are Two Major categories in this accounting method The Current Account The Capital Account NOTE: THESE TWO ACCOUNTS WILL ALWAYS BALANCE OUT WHEN ALL THE MATH IS SAID AND DONE!!! (Resist the all too legitimate urge to think otherwise)

Balance of Payments : Balance of Payments All we are doing is tracking and accounting for the flow of goods, services, certain other payments, real asset and financial transactions AND the MONEY (US Dollars and Foreign Currencies). We will use data from the 2011 Balance of Payments publication: http://www.bea.gov/newsreleases/international/transactions/transnewsrelease.htm

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease Credit: when foreigners Demand Dollars (hence Supplying the US with Foreign Currency ) to purchase a US good/service/real or financial asset (list not exhaustive), then this is a CREDIT on the US Current Account. The Chart you are about to see may overwhelm you. Hang in there and I will define the major categories for you. CURRENT ACCOUNT Financial/Capital Account

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credit Debit Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease CURRENT ACCOUNT Financial/Capital Account Current Account Records Transactions between the US and the Rest of the World in the following categories: 1. Exports of Goods FROM the US. 1. Imports of Goods TO the US 2. Export of Services FROM the US. 2. Imports of Services TO the US 3. Income Receipts TO Americans 3. Income Payments TO Foreigners who earned who earn interest in Foreign Currencies Interest in Dollars in the US In Foreign Countries 4. Unilateral Transfer Payments We will define each of these as we go along

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease Financial/Capital Account Records Transactions between the US and the Rest of the World in the following categories : 1. US Owned Assets (Financial and/or Physical) in Foreign Countries. Financial Asset : Stocks, Bonds or other financial investment instruments Physical Asset : Land, Factories, Businesses (something that is NOT normally moveable 2. Foreign Owned ASSETS (Financial and/or Physical) in the US. Financial Asset : Stocks, Bonds or other financial investment instrument Physical Asset : Land, Factories, Businesses (something that is NOT normally moveable 3 . Financial Derivatives, Net 4. Statistical Discrepancies 5 Official Reserves Account We will define each of these as we go along. Financial/Capital Account CURRENT ACCOUNT

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Debit Balance On Capital Acct Capital Acct Credit Debit U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease (Credit: ) When foreigners purchase a US produced (regardless of the nationality of the producer) good/service/real or financial asset (list not exhaustive), this is what is termed a CREDIT . Example: China buys wheat from a farmer in the US (Current Account) or Japan buys a piece of land in Illinois to build a car factory (Capital Account). A Credit will be recorded as a POSITIVE (addition) to the Balance of Payments. It creates an Increase in DEMAND for US Dollars and an Increase in SUPPLY of the Foreign Currency. Credits tend to APPRECIATE the US Dollar (“Financial Capital INFLOW”) and DEPRECIATE the Foreign Currency (“Financial Capital OUTFLOW”) Credit CURRENT ACCOUNT Financial/Capital Account

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credit Debit Balance On Capital Acct Capital Acct Credit Debit U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease CURRENT ACCOUNT Financial/Capital Account (DEBIT: ) When US citizens purchase a FOREIGN produced (regardless of the nationality of the producer) good/service/real or financial asset (list not exhaustive), this is what is termed a DEBIT . Example : A US grocery store buys bananas from Guatemala (Current Account). A US based investment fund buys some savings bonds from the Bank of China (Capital Account) A DEBIT will be recorded as a NEGATIVE (subtraction) to the Balance of Payments. It creates an Increase in DEMAND for FOREIGN CURRENCIES and an Increase in SUPPLY of the US DOLLARS. DEBITS tend to DEPRECIATE the US Dollar (“financial capital OUTFLOW”) and APPRECIATE the Foreign Currency (“Financial Capital INFLOW”)

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credit Debit Balance On Capital Acct Capital Acct Credit Debit U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease Bottomline : When there is a demand for dollars to buy “something” from the US then that is a CREDIT. When there is a demand for FOREIGN currency to buy “something” from Foreigners then that is a DEBIT … CURRENT ACCOUNT

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease EXPORTS of GOODS : Tangible items that we make in the U.S . and sell to Foreigners. “Stuff”, like planes, trains and automobiles, consumer goods, fuels (gasoline, diesel) , food, etc… See HERE for data on what we Export NOTE: ADD 3 ZEORES (000)TO THE END OF THE NUMEBERS 1,497,406 CURRENT ACCOUNT Financial/Capital Account

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) - Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct Balance of Payments (2008) CREDIT DEBIT Current Capital Account Account What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease EXPORT of SERVICES: Intangible items that we create in the U.S . and sell to Foreigners. Financial/Banking/Accounting services, health care, engineering, etc. NOTE: ADD 3 ZEORES (000)TO THE END OF THE NUMEBERS 1,497,406 605,961 CURRENT ACCOUNT Financial/Capital Account

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease INTEREST on SAVINGS/INVESTMENTS that AMERICANS earn on Savings/Investments Made in FOREIGN countries…EX: I earned 10 Euros on an investment in France and converted Those EUROS into DOLLARS (the ACTUAL Investment I made is accounted for in the Capital Account )---Be careful on this one---it IS tricky!! NOTE: ADD 3 ZEORES (000)TO THE END OF THE NUMEBERS 1,497,406 605,961 744,621 CURRENT ACCOUNT Financial/Capital Account

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) - Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease IMPORTS of GOODS : Tangible items that are made in FOREIGN countries and bought by U.S. consumers. (Basically ANYTHING Wal-Mart sells! BMW’s/Mercedes from Germany, Wine from France, Shoes from Italy, bananas from Guatemala, etc , NOTE: ADD 3 ZEORES (000)TO THE END OF THE NUMEBERS 1,497,406 605,961 744,621 - 2,235,819 CURRENT ACCOUNT Financial/Capital Account

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) - Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease IMPORTS of SERVICES: Intangible items that foreigners create and are bought by the U.S. Consumers. See HERE for more data on IMPORTS NOTE: ADD 3 ZEORES (000)TO THE END OF THE NUMEBERS 1,497,406 605,961 744,621 - 2,235,819 -427,428 CURRENT ACCOUNT Financial/Capital Account

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) - Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease Enrichment Note : When politicians cite the Trade Deficit, they focus on what is called the Merchandise Trade Balance- -- GOODS ONLY …Here we have a HUGE deficit (1,497,406 minus -2,235,819 = -$738,413 )… NOTE: ADD 3 ZEORES (000)TO THE END OF THE NUMEBERS 1,497,406 605,961 744,621 - 2,235,819 -427,428 CURRENT ACCOUNT Financial/Capital Account

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) - Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease However, they ignore the Trade Balance in Services, which we have a Trade SURPLUS ($605,962 minus - 427,428 = +$178,534 )… NOTE: ADD 3 ZEORES (000)TO THE END OF THE NUMEBERS 1,497,406 605,961 744,621 - 2,235,819 -427,428 CURRENT ACCOUNT Financial/Capital Account

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease INTEREST on SAVINGS/INVESTMENTS that FOREIGNERS earn on Savings/Investments made in the US …EX: Pierre (a Frenchman) earned $10 on an investment in Texas and converted those DOLLARS into EUROS (the ACTUAL Investment he made is accounted for in the Capital Account) NOTE: ADD 3 ZEORES (000)TO THE END OF THE NUMEBERS 1,497,406 605,961 744,621 - 2,235,819 -427,428 - 517,614 CURRENT ACCOUNT Financial/Capital Account

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease Unilateral Transfer Payments (NET ): (1) Remittances- --Money that Foreigners in the U.S . Send “home” MINUS Money that U.S. Citizens in foreign countries send back to the U.S. …If negative, then more money going out then coming in…. NOTE: ADD 3 ZEORES (000)TO THE END OF THE NUMEBERS 1,497,406 605,961 744,621 - 2,235,819 -427,428 - 517,614 - 133,053 CURRENT ACCOUNT Financial/Capital Account

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) - Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct Balance of Payments (2008) CREDIT DEBIT Current Capital Account Account - - What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease NOTE: ADD 3 ZEORES (000)TO THE END OF THE NUMEBERS 1,497,406 605,961 744,621 - 2,235,819 -427,428 - 517,614 - 133,053 -465,926 CURRENT ACCOUNT Financial/Capital Account This means that if we started this process at $0.00 and added our CREDITS and subtracted our DEBITS, there is a Net OUTFLOW of Dollars into the FOREX of -$465,926 Billion dollars…Where happens to those DOLLARS?...”It will come out in the wash”….Now we need to look at the other side of the ledger….CAPITAL ACCOUNT

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) - Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease NOTE: ADD 3 ZEORES (000)TO THE END OF THE NUMEBERS 1,497,406 605,961 744,621 - 2,235,819 -427,428 - 517,614 - 133,053 -465,926 CURRENT ACCOUNT Financial/Capital Account On the Current Account side of the Ledger, if we add our CREDITS and subtract our DEBITS, there is a Net OUTFLOW of Dollars into the FOREX of -$465,926 Billion dollars…Where happens to those DOLLARS?...”It will come out in the wash”….Now we need to look at the other side of the ledger….CAPITAL ACCOUNT

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account 764,637 What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease NOTE: ADD 3 ZEORES (000)TO THE END OF THE NUMEBERS 1,497,406 605,961 - 2,235,819 -427,428 - 517,614 - 133,053 -465,926 -483,653 Financial/Capital Account CURRENT ACCOUNT US Owned Assets Abroad —These are Financial and/or Physical Assets that Americans own In Foreign Countries. Financial Asset : Stocks, Bonds or other financial investment instruments Physical Asset : Land, Factories, Businesses (something that is NOT normally moveable) Example: I buy a Government Saving Bond from the British Government. This is a Foreign Financial Asset. The value of the Bond is recorded here BUT the interest I earn is recorded under INCOME RECIEPTS in the CURRENT ACCOUNT !! Example: General Motors builds an car manufacturing factory in China. This is a physical financial asset (It cannot be picked up and moved!

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account 764,637 What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease NOTE: ADD 3 ZEORES (000)TO THE END OF THE NUMEBERS 1,497,406 605,961 - 2,235,819 -427,428 - 517,614 - 133,053 -465,926 -483,653 Financial/Capital Account CURRENT ACCOUNT

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease Financial derivatives, net NOTE: ADD 3 ZEORES (000)TO THE END OF THE NUMEBERS 1,497,406 605,961 744,621 - 2,235,819 -427,428 - 517,614 - 133,053 -465,926 1,000,990 -483,653 CURRENT ACCOUNT Financial/Capital Account FOREIGNED Owned Assets in the US —These are Financial and/or Physical Assets that Foreigners own in the US. Financial Asset : Stocks, Bonds or other financial investment instruments Physical Asset : Land, Factories, Businesses (something that is NOT normally moveable) Example: China buys a US Government Saving Bond from the US Government. This is a US Financial Asset. The value of the Bond is recorded here BUT the interest I earn is recorded under INCOME PAYMENTS in the CURRENT ACCOUNT !! Example: Toyota builds an car manufacturing factory in Texas. This is a physical financial asset (It cannot be picked up and moved!

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease NOTE: ADD 3 ZEORES (000)TO THE END OF THE NUMEBERS 1,497,406 605,961 744,621 - 2,235,819 -427,428 - 517,614 - 133,053 -465,926 1,000,990 -483,653 CURRENT ACCOUNT Financial/Capital Account

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account 39,010 What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease NOTE: ADD 3 ZEORES (000)TO THE END OF THE NUMEBERS 1,497,406 605,961 744,621 - 2,235,819 -427,428 - 517,614 - 133,053 -465,926 -483,653 1,000,990 CURRENT ACCOUNT Financial/Capital Account FINANCIAL DERIVATIVES: financial instruments that are linked to, and whose value is contingent to, a specific financial instrument, indicator or commodity , and through which specific financial risks can be traded in financial markets in their own right. Transactions in financial derivatives are treated as separate transactions, rather than integral parts of the value of underlying transactions to which they may be linked. NOTE: Yeah, I don’t understand it either. AP Macroeconomics Test wont ask you about it…

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account 39,010 What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease NOTE: ADD 3 ZEORES (000)TO THE END OF THE NUMEBERS 1,497,406 605,961 744,621 - 2,235,819 -427,428 - 517,614 - 133,053 -483,653 1,000,990 -89,208 CURRENT ACCOUNT Financial/Capital Account Statistical Discrepancy: This is a “catch-all” category. In calculating these all These categories there are going to be miscounts and omissions. This is where It can be accounted for the 2 accounts balance out.

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net 39,010 Statistical discrepancy (sum of above items with sign reversed) Official Res. - Balance on Capital Acct Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account What is the FLOW of DOLLARS Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease Official Reserves: These are the Foreign Currency Reserves that the Govt /Financial System needs to have available so people, businesses, govt , can purchase FOREIGN GOODS. A Negative indicates that the Supply of Dollars is INCREASING to purchase the Foreign Currencies to meet the above requirement. NOTE: ADD 3 ZEORES (000)TO THE END OF THE NUMEBERS 1,497,406 605,961 744,621 - 2,235,819 -427,428 - 517,614 - 133,053 -465,926 -483,653 1,000,990 -89,208 CURRENT ACCOUNT Financial/Capital Account -17,089

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct 465,926 Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account 39,010 NOTE: ADD 3 ZEORES (000)TO THE END OF THE NUMEBERS Notice that the TWO Accounts are EQUAL---Dollars OUT = Dollars IN---These two accounts must ALWAYS balance---Remember—avoid the urge to thing differently!!! 1,497,406 605,961 744,621 - 2,235,819 - 517,614 -427,428 - 133,053 - 465,926 -483,653 1,000,990 -89,208 CURRENT ACCOUNT Financial/Capital Account -17,089 Capital Acct = +$465,926 Current Acct = -$465,926 $0

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct 465,926 Balance of Payments (2011) CREDIT DEBIT Current Capital Account Account 39,010 NOTE: ADD 3 ZEORES (000)TO THE END OF THE NUMEBERS Notice that the TWO Accounts are EQUAL---Dollars OUT = Dollars IN---These two accounts must ALWAYS balance---Remember—avoid the urge to thing differently!!! 1,497,406 605,961 744,621 - 2,235,819 - 517,614 -427,428 - 133,053 - 465,926 -483,653 1,000,990 -89,208 CURRENT ACCOUNT Financial/Capital Account -17,089

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Exercise from Morton : Exercise from Morton

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct FOREX MKT Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease Balance of Payments CREDIT DEBIT Current Capital Account Account Harley Davidson USA purchases $25 million in production machinery from a Japanese company. Financial/Capital Account CURRENT ACCOUNT

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct FOREX MKT Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease Balance of Payments CREDIT DEBIT Current Capital Account Account André Prenoor , U.S. entrepreneur, invests $50 million to develop a theme park in Malaysia.. Financial/Capital Account CURRENT ACCOUNT

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct FOREX MKT Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease Balance of Payments CREDIT DEBIT Current Capital Account Account A Chinese company sells $1 million worth of berets to the U.S. Army. Financial/Capital Account CURRENT ACCOUNT

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct FOREX MKT Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease Balance of Payments CREDIT DEBIT Current Capital Account Account BMW pays $1 million to a U.S. shipper for transporting cars from Germany to the United States Financial/Capital Account CURRENT ACCOUNT

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct FOREX MKT Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease Balance of Payments CREDIT DEBIT Current Capital Account Account Each month, Ima Grent , who recently arrived in the United States, sends half her paycheck to her sister in Poland. Financial/Capital Account CURRENT ACCOUNT

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct FOREX MKT Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease Balance of Payments CREDIT DEBIT Current Capital Account Account Bank of America pays $5 million in interest to French depositors. Financial/Capital Account CURRENT ACCOUNT

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct FOREX MKT Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease Balance of Payments CREDIT DEBIT Current Capital Account Account Senor Ramos from Spain buys a shopping center in Florida. Financial/Capital Account CURRENT ACCOUNT

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct FOREX MKT Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease Balance of Payments CREDIT DEBIT Current Capital Account Account A Brazilian investor buys five $10,000 U.S. Treasury bonds. CURRENT ACCOUNT

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct FOREX MKT Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease Balance of Payments CREDIT DEBIT Current Capital Account Account German tourists spend $3 million in the United States; U.S. tourists spend $5 million in Germany. Financial/Capital Account CURRENT ACCOUNT

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct FOREX MKT Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease Balance of Payments CREDIT DEBIT Current Capital Account Account Brit- Disz , a London record store, spends $10,000 on CDs by the Generic Gurls , a U.S. kiddy-pop group Financial/Capital Account CURRENT ACCOUNT

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct FOREX MKT Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease Balance of Payments CREDIT DEBIT Current Capital Account Account Sam Boney, U.S. ice-rink magnate, buys stock in a Chilean ice-rink chain. Financial/Capital Account CURRENT ACCOUNT

PowerPoint Presentation : Balance on Current Acct Unilateral Transfer Payments (net) Income Payments Imports - Services Imports - Goods Income Receipts Exports - Services Exports - Goods Balance On Current Account Current Acct Credits Debits Balance On Capital Acct Capital Acct Credits Debits U.S.-owned assets abroad increase/financial outflow (-) Foreign-owned assets in the United States (increase/financial inflow (+)) Financial derivatives, net Statistical discrepancy (sum of above items with sign reversed) Official Res. Balance on Capital Acct FOREX MKT Demand$ Supply $ Increase Increase Decrease Decrease Demand (€£¥) Supply (€£¥) Increase Increase Decrease Decrease Balance of Payments CREDIT DEBIT Current Capital Account Account Financial/Capital Account CURRENT ACCOUNT

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