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ch13 (5) - • CA = –$811 billion KA FA = $800 billion...

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Capital Account (KA) Capital account is relatively small, accounting for mostly capital transfers (debt forgiveness, gifts). plus some minor items: acquisition/disposal of non-financial, non- produced assets (patents, copyrights, franchises). The capital account is KA = KA IN – KA OUT KA < 0 Country gave more transfers than it received. KA > 0 Country received more transfers than it gave. Macroeconomic View Total resources available to the economy is the sum of resources available from income earned plus those available from the exchange of assets. This leads to the BOP identity Because CA + KA + FA = 0, a country’s current account indicates whether it is a net lender or net borrower . CA > 0, KA + FA < 0, net lender Country income exceeds expenditure Country is a net buyer/importer of assets or net lender CA < 0, KA + FA > 0, net borrower Country expenditure exceeds income Country is a net seller/exporter of assets or net borrower U.S. in 2006 was a net borrower.
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Unformatted text preview: • CA = –$811 billion. KA + FA =+$800 billion. • Difference: statistical error. • U.S. trends for BOP items. • Since 1990, U.S. current account deficit has grown. • CA deficit financed through borrowing from abroad (FA surplus). • Microeconomic View • Each transaction in the balance of payments must involve a BOP credit and a BOP debit. • Why? Every market transaction involves two parts: • If party A engages in a transaction with party B, then A receives from B an item of given value. • In return, B receives from A an item of equal value. • Microeconomic View • BOP credit items • Current account (CA) • Exports of goods and services (+EX) • Exports of factor services (+EX FS ) • Unilateral transfers received (+UT IN ) • Financial account (FA) • Exports of home and foreign assets (+EX H A , + EX F A ) • Capital account (KA) • Capital transfers received (+KA IN ) • Microeconomic View...
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