Unit 7 - International Trade

Unit 7 -international trade
Balance of Payments 
-measure of money inflows and outflows between the United States and the Rest of the World (ROW)
-inflows are referred to as credits 
-outflows are referred to as Debits 
-the balance of payments are divided into 3 accounts 
  -current account
  -capital/financial account
  -official reserve accounts 

Double entry bookkeeping
-every transaction in the balance of payments is recorded twice in accordance with standard accounting practice 
EX: U.S. Manufacturer, John Deere exports $50 million worth of farm equipment to Ireland 
  -a credit of 50mil to the current account (-50 million worth of farm equipment or physical assets)
  -a debit of 50 mil to the capital/financial account (+50 million worth of farm equipment or physical assets)

-balance of trade
  -exports of goods/services - imports of goods/services
-export create a credit to the balance of payments
-imports create a debit to the balance payments

-Net foreign income
  -income earned by US owned foreign assets - income paid to foreign held US assets
Ex: interest payments on US owned Brazillian bonds - interest payments on German owned US Treasury bonds

-Net Transfers (tend to be unilateral)
-foreign aid -> a debit to the current account
EX: Mexican migrant workers send money to family in Mexico 

Capital/Financial account
-the balance of capital ownership 
-includes the purchase of both team and financial assets
-direct investment in the US is a credit to the capital account 
  -EX: the toyota factory in San Antonio 
-Direct investment by US firms/individuals in a foreign country are debits to the capital account
  EX: the Intel factory in San Jose, California 
-purchase of foreign financial assets represents a debit to the capital account
Ex:warren buffet buys stock in petrochina
-Purchase of domestic financial assets by foreigners represents a credit to the capital account
  -the United Arab Emirates sovereign wealth fund purchases a large stake in the NASDAQ 

-Relationship between current and capital account
  -remember double entry bookkeeping? 
-the current account and the capital account should zero each other out.