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CHAPTER 16 PAYMENTS AMONG NATIONS Objectives of the Chapter This chapter looks at how international exchanges of goods, services, and financial assets are recorded in official statistics. Two sets of statistics are presented: the balance of payments accounts and the international investment position accounts. The trade, current, financial, and official settlements accounts are specialized accounts within the balance of payments accounts, and are derived by grouping international transactions according to common characteristics. Although the details of international accounting may seem a bit dry, there are two important economic uses for the accounts. The first use is in determining the relationship between the saving of a country’s residents and the amount of capital formation going on in that country: S = I d + I f = CA. So, for example, if country A is running a current account deficit we know that it is saving less than it is investing at home (S<I d ) and that other countries are investing in country A (I f < 0). Second, if there is a large difference between the value of the current account and the value of the financial account, it means that the country’s monetary authorities must be actively engaging in the buying or selling of official reserve assets. After studying Chapter 16 you should know 1. what information the balance of payments accounts record. 2. the distinction between debit and credit entries. 3. the meaning and scope of various accounts’ balances. 4. why the current account balance equals the difference between national product and national expenditure. 5. the concept of an overall balance of payments surplus or deficit. 6. the meaning and usefulness of the balance on international investment. 7. the historical status of the U.S. as net creditor or debtor with respect to the rest of the world. Important Concepts Balance of payments: The systematic set of accounts that records all economic transactions between residents of a country and the rest of the world during a given period of time. Financial account: Records the values of financial assets purchased and sold abroad by private residents (not monetary authorities) of the home country. A financial account surplus indicates that, on net, financial capital has flowed into the country. Capital inflow: Either an increase in foreign assets in the nation, such as when a foreigner purchases a U.S. stock; or a reduction in the nation’s assets abroad, such as when an American sells a foreign stock. Capital outflow:
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This note was uploaded on 02/18/2010 for the course ECON 343 taught by Professor Dblack during the Fall '09 term at University of Delaware.

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