Unit 7: 04/09/2015

Balance of payments
-Measure of money inflows and outflows between the U.S and the rest of the world (ROW)
*inflows are referred to as credits
*outflows are referred to as debits
Balance of payments are divided into three accounts
1.Current account
2. Capital/Financial account
3. Official reserves account

double entry book keeping
-every entry in the balance of payments is recorded twice in accordance with standard accounting practice.

Current account
-Balance of trade of net exports
*Exports of goods and services (-) imports of goods and services (-) exports create a credit to the balance of payments (-) imp. create a debt.
-Net foreign income
*income earned by U.S owned foreign assets (-) income paid to foreign held U.S assets.
-Net transfers
*foreign aid --> a debit to the foreign account,

Capital/financial account
the balance of capital ownership includes the purchase of both real and financial assets.
direct investments in the U.S is a credit to the capital account,

Capital/financial account
purchase of foreign financial assets represent debit to the capital account.

relationship between current and capital account
-Current and capital account should zero each other out

Official reserves
-The foreign current holdings of the U.S federal reserves system.
-When there is a ball of rice of payments surplus the fed accumulates foreign currency and debits the balance of payments.

Active Vs. Passive
-U.S is passive in its use of official reserves, doesn't seek to manipulate the dollar exchange rate.
-People republic of China is active in its use of official reserves. actively buys and sells dollars in order to maintain steady exchange rate with the U.S.