The BOP is the measure of $ based on inflows or outflows between the US and the world. (What goes in US goes out.)
Inflows are accounted as CREDIT. (adds to acct.)
Outflows are accounted as DEBIT. (subtracts from acct.)
3 Parts:
Current Account
Capital Account:
Official Reserves Account
Double Entry Book Keeping:
This occurs every time a transaction is recorded; it records it twice.
The transactions effect each other; The BOP should always equal zero.
Current Account
Consists of the balance of trade (net exports)
Formula: *Exports-Imports*
Exports create credut to balance of payments.
Imports create a debit to BOP.
Net Foreign Income
This is income earned by US owned foreign assets-income paid to foreign held by US assets.
Net Transfers formula: Foreign aid- a debt to the current acct.
Capital Account
This is the balance of capital ownership.
This includes the purchase of real and financial assets. Direct investmentnt in the US is credit to capital acct.
Direct investment by US firms/individuals in foreign country are debits to the capital account.
The Relationship Between Current/Capital Acct.
(double entry book keeping)
Current Acct. and Capital Acct. should zero each other out, ALWAYS.
Foreign Exchange Market
This is the buying and selling of currency.
The exchange rate is the price of a currency. Don't try to calculate the exact exchange rate!
Tips:
Always change the Dline on one currency graph, and the S line on the other. If the D on one graph shifts to the right, then the S line will do so on the other graph. The S and D always move in the same direction on both graphs.
Absolute Advantage: Faster, more efficient
Output problems look at production
Input problems deal with time.
Comparative Advantage is the lower opportunity cost.
Purchasing Power Parity:
- Markets will adjust quickly in floating rates or pressure for change will occur in fixed rates
- Why do we exchange currencies?
- To sell exports and buy imports
- To invest in another countries stocks and bonds.
- To build factories or stores in other markets.
- To speculate on currency values
- To hold currencies in bank accounts for future exports, imports, and business loans.
- To control excessive imbalances.
I think your notes could be easier to read or memorize if the main concepts were bold or if there were bullet points to separate things. I did like the tip though, its a good reminder that is not in most people's notes. Other than that they are very clean, short, and sweet. It isn't cluttered notes.
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