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Balance of Payments

Balance of Payments: Introduction


Balance of Payments: Introduction

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now let's see how a country can keep track of the money going into and out of its economy. So we're gonna use what's called a balance of payments. Okay, if you've done an accounting class, this is gonna look similar to one of the financial statements you've done maybe like a balance sheet and income statement. It's kind of somewhere in the middle there. Okay. So a country that trades with other countries. That's what we're focused on here. They're called open economies and they're basically economies that trade with each other. Okay. And we're gonna use this balance of payments, which just is a record of the transactions with other countries. We want to know how much money was going into our economy. How much was going out of our economy? Right? We keep track of this every year. So what I have here is an example balance of payments for the United States from the year 2014 here and notice it's in billions of dollars. So these numbers are really big here. What I want you to notice is we've got two main main categories here and we've got a third one that's not so important, but these two are the main ones that we're gonna spend our time with the current account and the financial account. And then down here we've got the capital account which is not so important. You can see that it has a trivial balance here. It even rounds down to zero. Okay. Um So let's look, we're gonna go into more details and other videos about these. But let's go and just on a high level, let's talk about these. So, notice what we have in our current account, we've got exports of goods, imports, of goods, exports, of service, imports of services here. We're talking about our net exports. So remember net exports, Well, this is just exports minus imports. Okay, exports minus imports is equal uh whoops in warts, that's equal to our exports there. And that's what we're dealing with here. We're showing the exports of goods. So how much goods were exporting that year? How many goods were importing? And notice you can see that we have a negative balance here for the United States. That means we're importing more than we're exporting, right? And you can see that that's a bigger number here in the import of goods up above. Okay. And it's been that way for a while, we've had this trade deficit where we're importing more stuff than we're exporting. But you can see what services it kind of about Is it back? Just a little bit where we're exporting more than we're importing. So we're exporting more than we're importing when it comes to services. But in in total, when we think of our net exports, its negative, right? We have more imports than exports. So, other categories here, you see our investment income. So, these are the three main ones. We've got our our net exports. We've got our investment income and then transfers. Okay, we'll get into more details about those in the other videos. The main one to think about here is those exports. Okay, the financial account, this is dealing with more long term things. This is dealing with holdings of U. S. Assets by foreigners and us owning stuff overseas as well. So this is generally when we own stocks and bonds. This is when we um own like property in other countries own factories or own housing in other countries, things like that. And you can see there's a balance here. This is foreign holding of U. S. Assets. So when foreigners hold our assets and where us hold foreign assets, okay. And you can see that the foreigners are holding more U. S. Assets. So that's money coming into our economy, right? Because foreigners are buying us assets. So that means there's money coming in and that's why we see a positive number there. The balance on capital count is very trivial things. Not a big deal in this class. And then we have this statistical discrepancy because the rule of the balance of payments is that it must equal zero. Okay, must equal zero at the end. Because if you think about this theoretically right, all the money going out of the economy has to be balanced with money coming in in the long term or the short term, there has to be this balance, right? And that's why it's called the balance of payments when there's money going out, there has to be something coming in in return right? If we're importing goods, well, money has to be leaving. If we're exporting goods, money has to be coming in right? There has to be this balance. So we'll get into a little more detail about that in the next video. But that's one of the main rules to remember here. When it comes to the balance of payments, just remember that it must equal zero. You might just get a quick multiple choice question like that about the balance of payments. That's that's the rule it must equal zero. So as a summary, when we think about the current account, we're thinking about short term the current account, think current short term current is the short term flow of funds into and out of a country. Like when we're talking about those exports and imports, things like that where the financial account is dealing with long term flows of funds. Like when we're buying a house overseas, right? Where we're thinking of these long term type of assets, Okay. And like I said, the capital account, it's trivial things that we're not gonna get into in this class, pretty much beyond the scope of the class. This is like when people leave the U. S. And they bring stuff with them. When they send send uh yeah, like when they when they send their things overseas, when they leave intangible assets, debt forgiveness, when we have some debt overseas and we forgive it, right? These types of things we're not going to get into in this class. We're going to focus more on these two. Okay, Capital account. Excuse me? Current account and financial account. Cool. Alright. Let's pause here and let's move on to the