Balance of payments- current account and capital account
Balance of Payments- Capital Account Understanding how changes in foreign ownership of assets effects balance of payments
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- In the last video we started to explore the payments
- that could flow into a country or out of a country
- and now I want to continue it more
- In particular, we focused on
- the current account last time, and that
- focused on things like trade
- exports and imports
- income earned from assets in another country
- or income that someone from outside of the country
- earns from assets
- in the country that we're studying
- or just transfers that are happening
- Now, when we look at the capital account
- in this video right over here
- (I wrote capital accounts,
- but there shouldn't be an "s" over here)
- we'll look at other ways or other reasons
- why we might have inflows or outflows of payments
- In particular, the capital account is focused on
- the change in assets
- that either foreigners own of
- in this case the US
- or that US nationals own of assets
- that are someplace else
- An this little triangle right over here
- is the greek letter delta
- just shorthand for change in
- So, once again, let's focus first on the inflows
- and when you're talking about change in assets
- these would essentially be
- someone outside the US buying assets inside the US
- from someone that was not foreign
- So for example, if I am a homebuilder
- I am an american citizen
- and I build a home in the US
- and I sell it for a million dollars to a Mexican national
- maybe for their vacation home
- that means that for just that transaction
- there's been an increase
- in foreign ownership of US assets
- that a million dollar home
- This number would be increased by a million dollars
- And, so that is why it is an inflow
- because when they bought that house
- they would have to make a payment TO ME
- And this right over here
- and we have a little bunch of stuffs over here:
- change in foreign-owned assets in US
- it also includes financial derivatives here
- and you don't have to worry too much about that
- And it also has change in foreign reserves
- The one way to think about the difference
- between that and that right over there
- you can view this as
- private-owned changes in ownership
- and this is essentially the offical changes in ownership
- by either the government
- or the central banks of foreign countries
- And for a lot of countries
- they are essentially one of the same thing
- In the US, they kind of maintain this sort of independence
- but this is, you can kind of view it as
- the offical government ownership
- and this over here is for the most part
- private ownership
- So once again if someone in the England
- would come to the US
- and buy, let's say, buy a share of IBM from an American
- then that would increase the number right over here
- But if the central bank of China decided to
- buy an US government bond from some American
- then this right over here would increase
- But they both the general idea:
- someone buys an asset
- (we are not talking about the income on the asset,
- we talked about the asset itself)
- someone buys an asset from
- or changes hands from an American national
- to a foreign national
- then these numbers would increase
- and those foreign nationals
- would have to make a payment into the US
- So once again these are the inflows right over here
- Now we take the other side of that coin
- If I were to go out and buy vacation home in Italy
- And let's say I buy it from an Italian.
- Then I would have to make a payment to them
- So that would be an outflow from the US
- And I would get an asset in Italy
- in exchange for my vacation home
- So this number right over here would increase
- Once again I wrote here in orange because it is an outflow:
- I'm making a payment to a foreign national
- And once again this is a breakdown between
- this is really the private sector for the most part
- and this over here is the US federal reserve
- so if the US federal reserve would go
- and buy an asset from a foreign government
- bank or individual
- let's say a foreign bond
- Then this number right over here would increase
- And actually the way I've classfied right over here:
- government purchases
- not the US federal reserve but the US government
- actually still falls into this category
- just the way I've set up the numbers
- this right over here is the US federal reserve alone
- now with that out of the way
- Let's actually figure out whether we are running
- a capital account deficit or a suplus
- So let's get our caculator back
- Let me open it right over here
- so we can see our numbers
- First of all let's think about the inflows
- this is how much more foreigners are buying US stuff
- So they are buying 625
- When I'm taling about stuff
- I'm talking about assets
- I'm not goods and services
- I'm talking about stocks and bonds and real estate
- So 625 billion plus another 165 billion
- if we talk about the offical purchases of
- governments and central banks
- So this is how much the increase of assets
- This is the changing assets purchase
- from foreigners in the US
- So they have to put in 790 billion dollars in 2007
- to make those purchases
- While on the other side of that
- The Americans went out and bought 380 billion
- when I write (ANS), that's answer
- that's just the previous answer
- so we have 790 billion
- which is what's inflowing
- and now this is outflowing
- 380 billion to buy assets in other countries
- that is what the non-federal actors do
- and federal reserve also buys
- and there is also outflows of payments
- And we are left with 394 billion
- A positive 394 billion
- This is 394 billion larger than this right over here
- So we are running a capital account surplus
- let me write that
- So we end up with an capital account surplus
- 394 billion
- And so you see these numbers are
- pretty close and I will tell you something
- and hopefully in future videos you will understand
- why this is happening in a little bit more depth
- But these numbers actually should have been
- the exactly same thing
- but we see they are off by about 80 billion
- So let me write this down
- we have an 80 billion dollar discrepancy
- And for most people that's a fairly large discrepancy
- but for talking about an economy the size of
- the United States
- that is already near 15 trillion
- it's not that huge a discrepancy
- and you have to think of how all these stuffs are measured
- They have to do serveys, they sample things
- you know
- they get all these numbers from all different sources
- So that's actually reasonable that
- you have some form of statistically discrepancy
- That's what actually is right over here
- This is the statistically discrepancy
- In theory these numbers should be the exact amount
- If you are running a current account deficit
- then you should have the exact amount
- in the capital account surplus
- And vice versa, if you have a capital account deficit
- then you would have to be running
- a current account surplus
- We will talk more about why this makes sense
- I encourage you to think about it right now
- why that makes sense
- And the difference between these numbers
- This is just the statistical discrepancy
- by the bureau of economic analysis
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At 5:31, how is the moon large enough to block the sun? Isn't the sun way larger?
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