Balance of Payments

Balance of Payments

• Current Account - Records net exports (goods and services), net income on investments (interest or dividends earned on investments that we have abroad) and net transfers (like charity donated to another country).
• Financial Account - Records purchases and sales of physical assets (like factories) and financial assets (like stocks and bonds)
• Capital Account - transactions like migrant transfers (things people take with them when they move to another country). It also includes non-financial, non-produced goods like trademarks, patents and copyrights.
• If the interest rate decreases, the domestic assets (bonds) are

  less

  ---

  attractive so the financial account will

  decrease

  ---

  and the domestic currency will

  depreciate

  ---

• This will cause the current account (net exports) to

  increase

  ---

  because it will be cheaper for other countries to buy our domestic goods.
• Net Foreign Investment (NFI) - this is also called Net Capital Outflow (NCO) and it is equal to net exports. It is Net Foreign Direct Investment (building factories/machines in other countries) + Net Foreign Portfolio Investment. It can also be thought of as domestic purchases of foreign assets - foreign purchases of domestic assets.

Lenders and Borrowers

• If the capital or financial account is in a deficit (negative number) this means that we are

  buying

  ---

  more bonds so we are a

  lender

  ---

• If the capital or financial account is in a surplus (positive number) this means that we are

  selling

  ---

  more bonds so we are a

  borrower

  ---