Monday, December 17, 2007

Balance of Payments - what you need to know

For the purposes of the final, here is what you need to know about Chapter 34

1) Balance of Payments - A record of all transactions between households, firms and the government of one country and the rest of the world
a) current account - trade balance + net transfers + net interest income
i) trade balance = exports - imports. Exports +, imports -
ii) net tranfers - gifts between countries. Gift to US +, gift to other countries -
iii) net interest income - income you receive from coupon payments (bonds) and dividends (stocks). US recieves (+), US gives (-)

b) Capital account - measures real asset flows (purchases of stocks, bonds, real estate, etc)
Foreign purchase of a US asset (+)
US purchase of a foreign asset (-)

c) reserve account - account that automatically balances out the BOP, measures official reserves
Foreign government purchase of USD (+)
US Fed purchase of foreign (-)

Basically, anything that would increase the demand for US dollars is a plus for the BOP, anything that would require selling of US dollars would be a negative.

II) USD appreciation/depreciation
a) Fed policy - If the Fed raises interest rates, the return on bonds goes up and this makes holding US dollars more attractive, all else equal. The reverse also holds true
b) Demand for US assets (appreciation)
c) demand for US goods (appreciation)
d) demand for foreign assets (depreciation)
e) demand for foreign goods (depreciation)

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