Balance of payments
- measure of money inflows and outflows between the US and the Rest of the World (ROW)
*Inflows are referred to as CREDITS
*out flows are referred to as DEBITS
- the balance of payments is divided by 3 accounts
- capital/ financial accounts
- official reserves accounts
Current Accounts
- balance of trade or net exports
-net foreign income
-net transfers (tend to be unilateral)
Capital/ Financial Accounts
- the balance of capital ownership
-includes the purchase of both real and financial assets
-direct investment in the US is a credit to the capital account
-direct investment by US Firms/ individuals in foreign country are debits to capital accounts
-purchase of foreign financial assets represents a debit to a capital account
-purchase of domestic financial assets by foreigners represents a credit to the capital accounts
Important Info:the current account and the capital account should zero each other out***
Official Reserves
-foreign currency holdings of US Federal Reserve System
-when there is a balance of payments surplus the FED accumulates foreign currency and debits balance of payments
-when there is a balance of payments deficit FED depletes its reserves of foreign currency and credits balance of payments
Active US passive official reserves
-the US is passive in its use of official reserves
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