The 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
• outflows are referred to as DEBITS 

Current Account

balance of trade or net exports

• exports of goods/ services- import of good/services
• Exports create a credit to the balance of payments
• Imports create a debit to the balance of payments 

Net Foreign Income

• income earned by US owned foreign assets- income paid to foreign held US assets
• Ex. Interest payments on US owned Brazilian bonds- interest payments on German owned US Treasury bonds

Net Transfers (tend to be unilateral)

• foreign aid ->a debit to the current account 
• Ex. Mexican migrant workers send money to family in Mexico 

Capital/ financial account: 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
• ex. The Toyota factory in San Antonio 

• direct investment by US firms/ individuals in a foreign country are debits to the capital account 
• ex. The intel factory in San Jose, Costa Rica 

• purchase of foreign financial assets represent a debit to the capital account 
• ex. Warren Buffet buys stock in Petrochina

• purchase of domestic financial assets by foreigners represents a credit to the capital account 
• ex. the United Arab Emirates sovereign wealth fund purchases a large stake in the NASDAQ

RELATIONSHIP BETWEEN CURRENT AND CAPITAL ACCOUNT

• the current and capital accounts should zero each other out
• If the current has a negative balance (deficit) the capital should have a positive balance (surplus) 

Official reserves 

the foreign currency holdings of the United States Federal Reserve System 

• When there is a balance of payments deficit the fed depletes its reserves of foreign currency and credits the balance of payments 
• When there is a balance of payments surplus the fed accumulates foreign currency and debits the balance of payments 
• The official reserves zero out the balance of payments 

Active v passive official reserves

the US is passive in its use of official reserves. It does not seek to manipulate the dollar exchange rate