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Studying for a test? Prepare with these 2 lessons on Foreign exchange and trade.
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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 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.