In this video, we explore how changes in foreign ownership of assets affects balance of payments. Created by Sal Khan.
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- In the previous video Sal says the "net transfers" include things like foreign aid and charitable donations. I don't see how these would create a corresponding entry in the capital account, because the Americans who give aid do not end up owning any assets in the foreign countries that receive the aid. Or am I missing something?(16 votes)
- In theory the money entering the US most be money that at some point has left the US.
Let me ask you this. If there is a surplus on the capital account, where does the money come from? The money must necessarily have left the US for the rest of the world to invest (using dollars) in the US. So for me to buy US bonds (capital account) you would have to either buy my goods or send me the money(current account). So in the end they necessarily have to equal each other.(14 votes)
- What is the difference between a capital account and a financial account?(8 votes)
- Both Capital Account and Financial Account are on the right hand side of the BOP (Balance of Payment).
The Capital account account records unilateral transactions... e.i: debt forgivness, transfer of assets from immigrants, grants to poor countries ... these are usually sums that you either get or donate. In developed countries Capital account is very small...
The Financial account is much more important and records: Assets owned by foreigners at home and our claims in the world as well as foreign reserves.
Of course in developing countries (most of Africa) the Capital account can be huge as a % from the BOP(8 votes)
- At6:30why is the 80 billion $ discrepency(3 votes)
- I can be very wrong but here are my thoughts:
1. Illegal activity (drug trade, prostitution, human trafficking)
2. Under the table income (unreported tips, babysitting, odd jobs like teens raking leaves)
3. Untruthful tax returns (back before we had social security numbers, people were claiming pets as exemptions. Now, people can find creative ways to get around that.)
4. Offshore accounts.(12 votes)
- Why does Sal refer to the capital account rather than the country's financial account? My understanding is that the items in his video are part of the financial account and that the capital account is made of up relatively minor transactions. My understanding is that, before 1999, under the one heading of "capital account" we could refer to all transactions that now comprise the financial and capital account, but that the budget office changed classifications in 1999 so that the main assets are part of the financial account and the minor assets and transactions are part of the capital account.(5 votes)
- This comment is correct. Sal really should have said "financial account" rather than "capital account". His knowledge was a bit out of date.(3 votes)
- So foreign direct investment (FDI) will show up as a positive in the capital account (foreign purchase of US asset), but the income made from these investments will show up as a negative in the current account. Can someone please clarify?(3 votes)
- i think that the current account in sal's video shows the money(in dollars) that US consumers are spending and thus giving to the rest of the world; therefore, it is a deficit/loss of american currency to the world. the capital account, on the other hand, is the money(in dollars) that the rest of the world is spending on/in the US, thus returning the US currency they got from america spending in the world back to the US. Since in this case the money is coming back into the US, it is a surplus. Therefore, the two accounts(capital and current) cancel each other out, though there is a slight discrepancy in the numbers due to other factors, such as some foreign countries holding back US cash and not spending it.(2 votes)
- How does this all tie together with the IS LM model? Also, does the capital account surplus have anything to do with an increase demand for safer U.S. Investments?(2 votes)
- It doesn't actually tie together with the IS/LM model though there is an extension to that model called the IS-LM-BP model which incorporates the balance of payments.
I'm not sure of the actual reasons for the surplus but it may indeed be one of the reasons. Another reason may be China's currency peg. However, keep in mind that the numbers here are old.(3 votes)
- I find it confusing how the terms,'debit' and 'credit' are used while dealing with the b.o.p,could someone explain?(1 vote)
- Just forget them. When speaking about the current account, debit = increase credit = decrease. When speaking about the capital account, it's the opposite. This is due to the system we use in the balance of payments, that requires that everytime we do a debit, we have to do a credit somewhere else with the same amount.(2 votes)
- What did Sal mean by 'on the order of $15 trillion'?(1 vote)
- Sal meant that the US economy was approximately $15 trillion (GDP). When comparing the 80B statistical discrepancy to 15 trillion, 80B doesn't seem like much (Sal says).(1 vote)
- Does the change in value of assets already owned accounted for in the capital account ? Eg, if foreign govt owes US treasuries, and the price of the treasuries goes down, is that captured in the capital account ?(1 vote)
- No, because there is no transfer of payments in that case. If the value of the treasuries goes down, no one gains money off of that. It is just lost.(1 vote)
- Another question, if an American sells off an overseas asset, and the proceeds are repatriated back to America, is that captured in the current account and which of the line items is it captured in the current account ?(1 vote)
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-- and I wrote capital accounts, there shouldn't be an s right there, when we look at the capital account, we look at other ways or other reasons why we might have inflows or outflows of payments. And in particular, the capital account is focused on that 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. And this little triangle right over here, that 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 home builder, I'm an American citizen, I'm a home builder, I build a home in the US. And then I sell it, for a million dollars to a Mexican national, maybe for their vacation home. That means that for just that transaction there has been an increase in foreign ownership of US assets, that million dollar home. And so this number would be increased by a million dollars. And so that's why it's an inflow, because when they bought that house they would have had to make a payment to me. And this right over here-- I have a bunch of stuff written over here-- change in foreign owned assets in US. And it also includes financial derivatives there, 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, this is you could view this as privately owned changes in ownership. And this is by essentially official changes in ownership by either the government or the Central Banks of foreign countries. And for a lot of countries they're essentially one and the same thing. In the US, they kind of maintain this pseudo-independence. But this is official, you could kind of view this as official government ownership. And this right over here is, for the most part, private ownership. And once again, if someone in England were to come into the US and buy, let's say buy a share of IBM from an American, then that would increase this number right over here. But if the Central Bank of China decided to buy a US government bond from an American then this right over here, would increase. But they're both the general idea. Someone buys an asset. We're not talking about the income on the asset. We're talking about the asset itself. Someone buys an asset from, or changes hands from and 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 inflows right over here. Now we take the other side of that coin. If I were to go out and buy a 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 it, my vacation home. And so this number right over here would increase. But once again, I wrote over here in orange because it is an outflow. I'm making a payment to a foreign national. And this 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 were to go and buy an asset from a foreign government bank or individual, let's say a foreign bond, than this number right over here would increase. And actually, the way I've classified right over here, government purchases, not the US Federal Reserve, but the US government actually still falls into this category, just the way I set up the numbers. This right over here is the Federal Reserve alone. Now with that of the way, let's actually figure out whether we're running a capital account deficit or a surplus. So let's get our calculator back. Let me get it and I'll put it right over here so we can see our numbers. And so let's think about the inflow. So this is how much more foreigners are buying of US stuff. So they're buying 625-- and when I say stuff, I'm talking about assets. I'm not talking about goods and services. I'm talking about stocks and bonds and real estate. So $625 billion. And then plus another $165 billion if we talk about the official purchases of governments and central banks. So this is how much increased asset-- this is the change in assets purchased from foreigners in the US. So they have to put in $790 billion into 2011 to make those purchases. Well on the other side of that, Americans went out and bought $380 billion. And when I write- that's just a previous answer. So we have $790 billion, which is what's inflowing. And now this is what's outflowing. $380 billion to buy assets in other countries that the non-Federal Reserve actors do. And then these are the assets that the Federal Reserve also buys. But those are 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're running a capital account surplus. Let me write that. So we end up with a capital account surplus, and it shows you how good-- what was it? $394 billion. And so you see that these numbers are pretty close. And now I'm going to tell you something, and hopefully in future videos you'll understand why this is happening in a little bit more depth. But these numbers actually should have been the exact same thing. These numbers should have actually been the exact same thing, but we see that they're off by about, what is it? They're off by about $80 billion. So let me write this down. We have and $80 billion discrepancy. And for most people, that's a fairly large discrepancy. But if we're talking about an economy the size of the United States, that's on the order of $15 trillion, it's not that huge of a discrepancy. And you have to think about how all of this stuff is measured. They have to do surveys. They sample things. They're getting all these numbers from all different sources. And so it's actually reasonable that you would have some form of statistical discrepancy. And that's actually what this is right over here. This is a statistical discrepancy. In theory, these numbers should be the exact amount. If you're running a current account deficit then you should have that exact same 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'll talk more about why that makes sense, although I encourage you to think about it. Think about it right now, why that makes sense, and the difference between these numbers. This is just a statistical discrepancy by the Bureau of Economic Analysis.