Balance of Payments Current Account (NX) –Export-Import & Investment Income 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 Sum of all 3 must be zero

Rupee Price of a Dollar Qty of Dollars D1D1 S1S P1P1 Q1Q1 The Dollar Market Event: U.S. invests more in India Market for Dollars S2S2 E1E1

GDP = C + I + G + NX

Affects AD LRAS 1 Price Level Real GDP SRAS 1 MD Nominal Interest Rate Qty of $ MS i1i1 Economic Situation: Economy at Full Employment AD 1 GDP = C + I + G + NX

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 stocksCapital 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