International Trade and the
Balance of Payments
The Balance of Payments
 BoP – The Balance of Payments (BoP) details the
flow of all international transactions in and out of
the country. The BoP is composed of three
components



Current Accounts
Financial Accounts
Capital Accounts
 The BoP allows us to investigate accounting
relationships between international flows of goods,
services, and financial assets.
Current Accounts
 Current Accounts – Records a country’s net exports,
net income on investment, and net transfers.



Net Exports – difference between exports and imports.
Net income investment – investment difference between home
and abroad (e.g. interest and dividend payments, earnings of
firms and workers operating in foreign countries).
Net transfer payments – Charitable donations.
Financial Accounts
 Financial Accounts – Records purchases of assets a
country has made abroad and foreign purchases of
assets at home.


Capital Outflow from the U.S. – When an U.S. agent invests
into a foreign company or gov’t or when a U.S. firm builds a
factory in another country.
Capital Inflow into the U.S. – When a foreign agent invests
into a U.S. firm or gov’t or build a factory in our country.
Financial Accounts
 If Financial Accounts > 0, then foreigners are
investing more into the U.S. than Americans are
investing abroad.
 If Financial Accounts < 0, then Americans are
investing more into foreign countries than at home.
 This is a very important part of the BoP, showing
whether if capital is flowing out or in of the country.

Our current Financial Accounts are positive.
 Net financial inflows were $73.1 billion in the second
quarter of 2103, up from $40.4 billion in the first.

http://www.bea.gov/newsreleases/international/transactions/transnewsrelease.htm
Capital Accounts
 Capital Accounts – Records relatively minor
transactions, such as migrants’ transactions - which
consists of goods and financial assets people take
with them when they leave or enter a country.
 *Note: prior to 1999, Capital Accounts consisted of
Financial Accounts. It went from being a very
important part of the balance of payments to being
relatively unimportant.
Balance of Trade
 Don’t confuse the Balance of Payments with the
Balance of Trade (BoT).
 The BoT is the difference between our exports and
imports of goods (not services).


It is the largest component of the Current Account.
The BoT is often what the media and politicians discuss.
Monetary Policy in an Open Economy
 When the Fed changes interest rates, this can affect
Nx (and Aggregate Demand).


Lower interest rates weakens the dollar as economic agents
switch from holding US assets (gov’t bonds) to foreign assets.
Therefore, lower interest rates stimulates exports and lowers
imports, and vice versa.
Monetary policy is more effective in an open economy than a
closed economy.
Fiscal Policy in an Open Economy
 Expansionary fiscal policy may increase interest,
causing a stronger dollar and a reduction in net
exports.
 Fiscal policy is less effective in an open economy.