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Capital Flows: The Balance of Payments Amy B. Hennessy Federal Reserve Bank of Atlanta.

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Presentation on theme: "Capital Flows: The Balance of Payments Amy B. Hennessy Federal Reserve Bank of Atlanta."— Presentation transcript:

1 Capital Flows: The Balance of Payments Amy B. Hennessy Federal Reserve Bank of Atlanta

2 Balance of Payments Accounts A country’s balance of payments accounts are a summary of the country’s transactions with other countries.  A reflection of the capital flows of a nation  The sum of the capital outflows MUST = capital inflows  Every dollar has a source  Every dollar received gets used somewhere Source: Krugman, Paul. and Wells, Robin. Economics. New York, NY: Worth Publishers, 2009.

3 Current Account: the balance of payments on goods and services plus net international transfer payments and factor income. ( Do not create future liabilities!) Trade Balance: Exports ─ Imports (Goods only) (Most reported in news) Factor Income: Income for use of factors of production Transfers: Remittances, et. al. Financial Account (Capital Account): the balance of payments that involve the sale or purchase of assets. (Create future liabilities!) Official Asset Sales and Purchases: Central banks, foreign exchange reserves, etc. Private Assets Sales and Purchases: Stocks, real property, etc. Current Account + Financial Account (Capital Account) = 0 ( Official Reserves Transactions Account used to offset balance of payments deficits/surpluses. Counterbalancing account.) Balance of Payments:

4 Examples of Current Account Money(Capital) Flows CreditsDebits 1.Exports1. Imports 2.Interest received on foreign loans2. Interest paid on foreign loans 3.Profits of U.S. companies overseas3. Profits of foreign companies in U.S. 4.Foreign payments for U.S. services4. U.S. payments for foreign services 5.Income earned by U.S. citizens overseas5. Income earned by foreigners in U.S. 6.Remittances sent from overseas to U.S.6. Remittances sent by immigrants in U.S. home Examples of Financial Account Money(Capital) Flows CreditsDebits 1.Foreign purchases of U.S. real property1. U.S. purchases of foreign real property 2.Foreign purchases of shares in U.S. company2. U.S. purchases of shares in foreign company 3.Foreign purchases of U.S Treasury bonds3. U.S. purchases of foreign government bonds Balance of Payments:

5 Source: Krugman, Paul. and Wells, Robin. Economics. New York, NY: Worth Publishers, 2009. The U.S. Balance of Payments in 2007 (billions of dollars) Payments from foreigners Payments to foreigners Net 1. Sales and purchases of goods and services $1,646$2,346-$700 2. Factor income $818 $736 $82 3. Transfers ---- -$113 Current account (1 + 2 + 3) -$731 4. Official asset sales and purchases $411 $22$389 5.Private sales and purchases of assets $1,653$1,267$386 Financial account(capital account) (4 + 5) $775 Total ---- ---- $44 Source: Bureau of Economic Analysis. U.S. Balance of Payments Accounts

6 Source: Krugman, Paul. and Wells, Robin. Economics. New York, NY: Worth Publishers, 2009. United States Rest of World Payments to the rest of the world for goods and services, factor income, and transfers Balance of Payments Accounts Payments to the United States for assets Payments to the United States for goods and services, factor income, and transfers The red arrows represent payments that are counted in the current account. The blue arrows represent payments that are counted in the financial account(capital account). Since the total flow into the U.S. must equal the total flow out of the U.S., the sum of the current account plus the financial account(capital account) is zero.


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