1. Balance of Payments
AP/IB Economics

2. Meet the Costas’

4. Balance of Payments Account
Sum of all the transactions that take place between its residents and the residents of all foreign nations over a period of time.
Credit = $ in (+) Debit = $ out (-)
Current account = goods + services + net income flows
Financial/Capital account = assets
Official reserves account = foreign currencies owned by central banks of nations, used to balance out BoP

5. Current Account Goods = visible trade balance
Services = invisible trade balance
Workpoint 24.1 p. 295
What is an invisible import, a visible import, an invisible export, and a visible export on the UK current account?
UK computer manufacturers buy semi-conductors from Malaysia.
Lloyds of London sells insurance to Chinese shipping companies.
Canadian football fans buy tickets to a Manchester United game.
British football fans attending the World Cup 2010 stay in hotels in South Africa.
France buys North Sea natural gas from UK companies.

6. Current Account
Factor Income = use of factors of production owned by residents of other countries (profit, interest, and dividends from financial investment abroad)
Transfers = net transfers of money that are not as payment for goods or services (foreign aid, grants, remittances, gifts)
CURRENT ACCOUNT =
balance of trade in goods + balance of trade in services + factor income flows +
transfers

7. Net errors and omissions
Financial Account
Net change in foreign ownership of domestic financial assets
Direct investment
Portfolio investment
Reserve assets
Financial account +
Net errors and omissions
Current account

8. Crud… What’s the difference??
CURRENT ACCOUNT
FINANCIAL ACCOUNT
The transactions end
No liability is created
1 and done
Transactions continue
Creates a liability

10. US BoP figures 2007 2008 2009 Exports of goods 1,160,366 1,304,896
1,068,499
Imports of goods
-1,983,558
-2,139,548
-1,575,443
Balance of trade in goods
-823,192
-834,652
-506,944
Exports of services
488,299
534,116
502,298
Imports of services
-367,206
-398,266
-370,262
Balance of trade in services
121,093
135,850
132,036
Income receipts
829,602
796,528
588,203
Income payments
-730,049
-644,554
-466,783
Net income receipts
99,553
151,974
121,420
Unilateral current transfers
-115,548
-122,026
-124,944
Net income flows
-15,995
29,948
-3,524
Current account balance
-718,094
-668,854
-378,432
Capital account transactions
384
6,010
-140
US-owned assets abroad
-1,475,719
156,077
-140,465
Foreign-owned assets in USA
2,107,655
454,722
305,736
Financial derivatives
6,222
-32,947
50,804
Statistical discrepancy
79,552
84,992
162,497
Financial account balance
718,094
668,854
378,432

11. US Trade Surplus and Deficit

12. Simulation Time!
Welcome to Eaststan or Weststan!

13. Self-correcting Balance of Trade$  X  M  X  M 
.: XN 
.: XN  $ 

14. Self-correcting Balance of Trade$  X  M  X  M 
.: XN 
.: XN  $ 

15. AP FRQ 2008
2. Balance of payments accounts record all of a country’s international transactions during a year. (a) Two major subaccounts in the balance of payments accounts are the current account and the capital account. In which of these subaccounts will each of the following transactions be recorded? (i) A United States resident buys chocolate from Belgium. (ii) A United States manufacturer buys computer equipment from Japan. (b) How would an increase in the real income in the United States affect the United States current account balance? Explain. (c) Using a correctly labeled graph of the foreign exchange market for the United States dollar, show how an increase in United States firms’ direct investment in India will affect the value of the United States dollar relative to the Indian currency (the rupee).

16. 6 points ( ) (a) 2 points: • One point is earned for stating that the transaction will be recorded in the current account. (b) 2 points: • One point is earned for stating that the current account balance will decrease or move toward a deficit. • One point is earned for explaining that the increase in income causes imports to increase. (c) 2 points: • One point is earned for a correctly labeled graph of the foreign exchange market for the U.S. dollar. • One point is earned for shifting the supply of U.S. dollars to the right and showing a depreciation of the dollar.

17. AP FRQ: 2008 form B
2. Suppose that Mexico decreases its tariff rates on all of its imports of automobiles from abroad. (a) Will each of the following groups benefit from the decrease in the tariff rate? (i) Mexican consumers (ii) Mexican automobile manufacturers. Explain. (b) How would the decrease in the tariff rates affect each of the following in Mexico? (i) Current account balance. Explain. (ii) Capital account balance (c) Given the change in Mexico’s current account in part (b)(i), what will happen to the aggregate demand in Mexico?

18. 7 points ( ) (a) 3 points: • One point is earned for stating yes for Mexican consumers. • One point is earned for stating no for Mexican manufacturers. • One point is earned for the explanation that reducing tariffs will cause the domestic price of automobiles to fall in Mexico, lowering the production of cars in Mexico. (b) 3 points: • One point is earned for indicating that the current account will move toward a deficit. • One point is earned for the explanation that the reduction in tariff increases imports relative to exports. • One point is earned for stating that the capital account will move toward a surplus. (c) 1 point: • One point is earned for concluding that aggregate demand will decrease.