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Unformatted text preview: tions is measured These discrepancies can be large and variable 21 The CA and the Cap. Acct CA Cap. • Every transaction initiated in the current initiated account gives rise to a transaction on the capital account Barter is extremely rare All transactions are financed • For example, a U.S. resident imports a BMW from Germany for $35,000 $35T appears as merchandise import on the CA CA $35T appears as foreign holdings of U.S. assets on the CapA CapA This is the loan or credit 22 Transactions On the Cap. Acct. Cap. • A transaction initiated in the capital account initiated will generally not have a counterpart on the not current account • For example, a US investor buys 10M € for $15.3M $15.3M appears as of US holdings of foreign assets (DM) $15.3M appears as of Foreign holdings of US assets 23 5 5 Reserves Account • Reserves account = Changes in Net official Changes reserves held by the central bank Also: • Reserves account = Current account + Non-reserve capital Nonaccount • There are many informal definitions of “CA Deficit” Deficit” Often a BOP deficit or surplus means the BOP changes in the Reserves Account 24 BOP Deficit (cnt.) cnt.) • What does it mean to say: the US CA deficit CA was $668 billion in 2005? 27 BOP Example #2 Example (page 202, question 1) Merchandise exports Merchandise imports Service exports Service imports Income receipts from abroad Income payments to foreigners Increase in home country’s ownership country’ of foreign assets Increase in foreign ownership of home country assets Increase in home reserve assets Increase in foreign reserve assets = 100 = 125 = 90 = 80 = 110 = 150 = 160 = 200 = 30 = 35 32 6 6 BOP Example #2 Find the merchandise trade balance, NX, CA, the merchandise NX CA capital and financial account balance, the statistical discrepancy and the official settlements balance Merchandise Trade balance = NX = CA = Cap. A = Statistical discrepancy = Official Settlements balance = 33 BOP Deficit (cnt.) cnt.) • Why do we care? In general, persistent deficits may indicate an may overvalued currency or other imbalances It always means either a decline in foreign assets, or an increase in foreign indebtednes...
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This note was uploaded on 03/02/2010 for the course BUAD 350 taught by Professor Safarzadeh during the Spring '07 term at USC.

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