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The Balance of Payments: Linking the United States to the International Economy

The Balance of Payments: Linking the United States to the International Economy. The Current Account. Trade Flows for the United States and Japan, 2006. The Balance of Payments of the United States, 2006 (billions of dollars). Don’t forget net compensation of nationals working abroad

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The Balance of Payments: Linking the United States to the International Economy

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  1. The Balance of Payments: Linking theUnited States to the International Economy The Current Account Trade Flows for the United States and Japan, 2006

  2. The Balance of Payments of the United States, 2006 (billions of dollars) Don’t forget net compensation of nationals working abroad (= Labor Services) The Balance of Payments balances: Current Account + Financial Account + Capital Account + Statistical Discrepancy = ZERO

  3. U.S. Imports and Exports, 1970–2006

  4. Current account Records payments for currently produced goods and services, including capital and labor services. • Mostly exports and imports of goods and services. • Also includes net int’l earnings of country’s labor and capital resources. • Unilateral transfers (exports and imports not paid for) are netted out. Financial account The part of the balance of payments that records purchases of assets a country has made abroad and foreign purchases of assets in the country. Net foreign investment The difference between capital outflows from a country and capital inflows. Also equal to net foreign direct investment (fdi) plus net foreign portfolio investment. Capital account The part of the balance of payments that records relatively minor transactions, such as migrants’ transfers, and sales and purchases of nonproduced, nonfinancial assets.

  5. Balance of Payment Arithmetic Current Account Balance + Financial Account Balance = 0 Current Account Balance = -Financial Account Balance or: Net Exports = Net Foreign Investment … NX = NFI • Private Saving = National Income – Consumption - Taxes • Sprivate = Y – C – T = (C + I + G + NX) - C - T = I + (G - T) + NFI • Private saving finances domestic and foreign investment and the government’s deficit • Public Saving = Taxes – Gov’t Spending = Spublic = T – G • National Saving = Private Saving + Public SavingS = Sprivate + Spublic • S = [I + (G - T) + NX] + (T - G) = I + NFI • A country that saves a lot has positive NX and invests abroad • NFI = I - S = I - Sprivate - (T - G) = (I - Sprivate) + (G - T) = - NX • Twin Deficit: G-T up  NX down

  6. Why Is the United States the “World’s Largest Debtor”? Large current account deficits have resulted in foreign investors purchasing large amounts of U.S. assets.

  7. Can the U.S. Current Account Deficit Be Sustained?  Rebalancing! Sustaining the Unsustainable U.S. trade-weighted exchange index: Major currencies.

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