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>> Open-Economy Macroeconomics Section 1: Capital Flows and the Balance of Payments chapter 19 In 2004 people living in the United States sold about $3 trillion worth of stuff to peo- ple living in other countries and bought about $3 trillion worth of stuff in return. What kind of stuff? All kinds. Residents of the United States (including firms operat- ing in the United States) sold airplanes, bonds, wheat, and many other items to resi- dents of other countries. Residents of the United States bought cars, stocks, oil, and many other items from residents of other countries. How can we keep track of these transactions? In Chapter 7 we learned that econ- omists keep track of the domestic economy using the national income and product accounts. Economists keep track of international transactions using a different but related set of numbers, the balance of payments accounts .
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2 CHAPTER 19 SECTION 1: CAPITAL FLOWS AND THE BALANCE OF PAYMENTS Balance of Payments Accounts A country’s balance of payments accounts are a summary of the country’s trans- actions with other countries. The most important feature of that summary is the dis- tinction between the balance on current account and the balance on financial account . Look back at the examples we just gave of U.S. sales to foreigners: airplanes, bonds, wheat. When a U.S. resident sells a good such as wheat to a foreigner, that’s the end of the transaction. But a financial asset, such as a bond, is different. Remember, a bond is a promise to pay interest and principal in the future. So when a U.S. resident sells a bond to a foreigner, that sale creates a liability: the U.S. resident will have to pay interest and repay principal in the future. The balance of payments accounts dis- tinguish between transactions that don’t create liabilities and those that do. Most of the transactions that enter the current account consist of international sales and purchases of goods, such as wheat and oil, and services, such as computer consulting and hotel rooms. The balance of payments on goods and services is the difference between the value of exports (sales of goods and services to foreigners) and the value of imports (purchases of goods and services from foreigners) during a given period. The difference between a country’s exports and imports of goods alone—not including services—is the merchandise trade balance, sometimes referred to as the trade balance for short. Economists sometimes focus on the merchandise trade bal- ance, even though it’s an incomplete measure, because data on international trade in services aren’t as accurate as data on trade in physical goods. The balance of payments on current account, often referred to simply as the current account, is a slightly broader measure than the balance of payments on goods and services. It consists of the balance of payments on goods and services plus net international transfer payments and net international factor income. Transfer payments are funds sent by residents of one country to residents of another—for
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