Balance of Payments Balance of Trade Balance of Payments • Method countries use to monitor all international monetary transactions • Every country keeps an accounting record of international transactions between itself and the rest of the world. • Actual transactions are made primarily by individual people or firms not the government. • If a country receives money, this is a credit • If a country pays or gives money, the transaction is a debit Balance of Payments 3 main accounts: • Current account • Capital account • Financial account Balance of Payments 3 main accounts: • Current account • Capital account • Financial account Balance of payments must balance The sum of the accounts must = 0 Current Account • Also known as the Balance of Trade - Records the monetary value of both U.S. exports and U.S. imports • Exports • Represent money coming into the United States as payment for goods and services. • Recorded as credits (+) • Imports Export • Represent money going out of the U.S. as payments for goods and services made in other countries • Recorded as debits (-) Import Current Account: Balance of Trade Current account = Exports – Imports • Positive number (+): trade surplus • Negative number (-): trade deficit Exports Imports Capital Account • The transfer (buying or selling) of fixed capital assets • If a foreign company buys a factory – this a credit to the U.S. capital account • Money comes into the United States • (nothing leaves – not an export) • If a U.S. Company purchases a shopping center in Mexico – this is a debit • Money leaves the United States Financial Account • Balance of payments also includes the value of • International financial transactions • International purchases of capital Examples: • Someone in Argentina purchases a U.S. Treasury Bond • recorded as a credit – the money is entering the United States • U.S. resident purchases stock in an European company • Recorded as a debit – the money is leaving the United States Bottom Line Balance of Payments - 3 main accounts: • Current account • Capital account • Financial account • Balance of payments must balance (equal ZERO) • Balance of Trade • Monetary value of exports vs. imports • More out than in (+) => Surplus • More in than out (-) => Deficit The calculation of a country’s balance of trade involves the value of its A. exports and imports B. net exports and gross domestic product C. foreign exchange rate and discount rate D. foreign investments and investments by foreigners Which of the following statements correctly describe the difference between the balance of trade and the balance of payments? A. The balance of trade is always in deficit and the balance of payments is always in surplus. B. The balance of trade records barter transactions while the balance of payments records transactions made with money. C. The balance of trade is the current account balance and is one of the accounts found in the balance of payments. D. The balance of trade records exports while the balance of payments records imports..