Balance of Trade

Balance of trades or net exports 

Exports of goods - imports of goods

Exports create a credit to the balance of payments 

Imports create a debit 

Net foreign income 

- income earned by U.S. Owned foreign assets - income paid to foreign held US asset 

Net transfers 

-foreign aid -> a debit to the current account 

Capital/ financial accounts

-the balance of capital ownership

- includes the purchase of both real and financial assets 

-direct investment in the united states is a credit to the capital account 

-direct investment by the U.S. firms/ individual a foreign country are debuts to the capital account 

Capital/financial account 

- purchase of foreign financial assets represents a debit to the capital stock 

- purchase of domestic financial assets by foreigner represent a credit to the capital account 

Relationship between current and capital account 

- the current account and the capital account should zero each other out 

- that is ... If they current account has a negative balance (deficit) then the capital account should then have a positive balance (surplus)

Official reserves 

-the foreign currency holdings of the U.S. federal reserve system

- when there is a balance of payments surplus the fed accumulates foreign currency and debits the balance of payments 

- when there is a balance of payments deficits the fed depletes its reserves of foreign currency and credits the balance of payments 

- the official reserves zero out the balance of payments 

Active vs passive official reserves 

- the U.S. Is passive in its use of official reserves. It doesn't seek to manipulate the dollar exchange rate

- the people republic of China is active in its use of official reserves. It actively buys and sells dollars in order to maintain a steady exchange rate writhing the U.S.