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Video transcript

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 should be an S right there when we look at the capital account we look at other ways of act or other reasons why we might have inflows or outflows of payments and in particular the capital account is focused on is focused on the change in 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 focus focus flow 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 some 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 built a home in the US and then I sell it as four million dollars to a Mexican national maybe for their vacation home that means that on for just that transaction there's been an increase in foreign ownership of US assets that million dollar home and so this number this number would be increased 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 have a bunch of stuff written over here change in foreign owned assets in US and it also includes financial derivatives here you don't worry too much about that it also has changed for foreign 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 the essentially official changes in ownership by either the government or the federal razorba central bank's of foreign countries and for a lot of countries they're essentially one of the same thing in the u.s. they kind of maintain this pseudo independence but this is 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 so once again if someone in England were to come into the u.s. and by 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 from sup from an American then this right over here then this right over here would increase but they're both the general idea someone buys an asset not we're not talk about the income on the asset we're talking about the asset itself someone buys an asset from or changes hands from a in American national to a foreign national then these numbers would increase and those foreign nationals would have to make it 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 it would be and I would get an asset in Italy in exchange for it my vacation home and so that this number this number right over here would increase but once again I wrote it 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 u.s. u.s. federal 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 then this number then this number right over here would increase and actually the way I've classified it 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 Federal Reserve alone now with that out of the way let's actually figure out whether we're running a cow it'll account deficit or a surplus so let's get our calculator back let me 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 u.s. 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 six hundred and twenty five billion and then plus another one hundred and sixty five billion if we talk about the official perfect 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 had to put in seven hundred ninety billion dollars in 2011 to make those purchases well on the other side of that Americans went out and bought three hundred eighty billion and when I write that's answer that's just a previous answer so we have seven hundred ninety billion which is what's in flowing and now this is what's out flowing three hundred eighty billion to buy assets in other countries that that the non Federal Reserve actors do and then let's these are the assets that the Federal Reserve also buys but those are also outflows of payments and we are left with three hundred ninety four billion a positive three hundred ninety four billion this is three hundred ninety four billion larger than this right over here so we're writing a capital account surplus let me write that so this is so we end up with we end up with a capital capital capital account capital account surplus surplus and it shows you how good move is at three hundred and three hundred ninety four billion three hundred and ninety four billion and so you see that these numbers are pretty close and now I'm going to tell you something you'll and hopefully in future videos we'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 they're off by about 80 billion so let me write this down we have an eighty billion dollar discrepancy and then 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 discrepancy and you have to think about how all of this stuff is measured they have to do surveys they sample things you know all 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 statistical discrepancy in theory these numbers should be the exact amount the 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 so we'll talk more about why that makes sense all I encourage you to think about it think about it right now why that makes sense and there's the difference between these numbers this is just a statistical discrepancy by the Bureau of Economic Analysis
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