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Balance of Payments Balance of Payments: record of all payments made and received between two nations. Must sum to zero.
•+ (credit: foreign payment to the U.S. --- a credit means the U.S. earn supplies of foreign currencies) •- (debit: U.S. payment to a foreign nation --- a debit means the U.S. uses its reserves of foreign currency to make a purchase; foreign nations gain reserves of U.S. dollars) •Deficitin the Balance of Payments --- U.S. is paying out more for foreign goods, services, investments etc., than it is receiving. U.S. is not earning enough foreign reserves to cover our purchases from foreign nations. •Surplusin the Balance of Payments --- Payments to the U.S are greater than U.S. payments to foreign nations. U.S. is earning more in foreign currencies than it is using to purchase foreign goods, services, investments. Current Account Capital Account Official Reserves Balance on Goods(exports/imports of goods and services) Balance on Services(exports/imports of services) Balance on Goods and Services(balance of trade) Net Transfer Payments Net Dividends and Interest (net returns on previous investments) Balance on the Current Account U.S. purchases of foreign real and financial assets (outpayments/outflows of capital) Foreign purchases of U.S.real and financial assets (inpayments / inflows of capital) Balance on the Capital Account + reserves: if deficitin balance of payments (official reserves of the FED are drawn down to balance the shortfall in foreign currency) - reserves: if surplusin balance of payments (official reserves of the FED increase to due to the excess in foreign currency) Official reserves held by central banks (the FED in the U.S.) are the means by which the capital and current accounts are balanced to zero. Effects of Tariffs, Quotas and Subsidies in International Trade U.S. tariffs and quotas ↓the domestic supply of foreign goods and ↑their prices. In the short-run, domestic production ↑due to the higher prices. Subsidies ↑the supply of goods and ↓their price in the short-run. Effect of a Quota SDU.S. quotas reduce the total world trade quantity and increase the market price. Domestic producers will produce more at higher price, but overall price is higher/Q less for consumers because quota ↓foreign Supply available to U.S. consumers.Effect of a Subsidy SD no subsidySubsidies increase the total world trade quantity and decrease its price. The price is less for consumers and quantity is greater. Effect on domestic production depends on if subsidies are domestic (↑due to lower production costs) or foreign (↓domestic production due to lower costs of foreign competition and lower market price).Domestic Q without T Domestic Q after T U.S. tariffs reduce the total wquantity and increase the maDomestic producers will produhigher price but consumers wmore and have less Q availabtariff because the tariff restrisupply available to U.S. consuTotal Q ↓with Tariff Absolute and Comparative Advantage and International Trade Effect of a Tariff D SD +FSD +F w /TQD Q