Balance of Payments

Balance of payments

• Sum of all the transactions that take place between a nation's residents and the residents of all foreign nations
• Transactions include:

               1) Exports and imports of goods
               2) Exports and imports of services
               3) Tourist expenditures
               4) Interest and dividends received or paid abroad
               5) Purchases, sales of financial or real assets abroad

• Divided into 3 components: Current Account, Capital Account, and Official Reserves Account
• The three components must equal zero when figured together

Current Account

• U.S. trade in currently produced goods and services
• Balance of current account" found when all the transactions in current account are added

Capital Account

• Summarizes the purchase or sale of real or financial assets and the corresponding flows of monetary payments that accompany them

Official Reserves Account

• Quantities that central banks of nations hold of foreign currencies

Payments Deficits and Surpluses

• Balance-of-payments deficits and surpluses: refer to imbalances between current and capital accounts that cause a drawing down or up a building up of foreign currencies

Example: