power. What about foreign buyers of bonds issued by the U.S. government? Foreigners owned about 52% of these bonds at the end of December 2010; they are thus the creditors for about half the national debt. But this position hardly puts them in control of the government of the United States. They hold an obligation of the U.S. government to pay them a certain amount of U.S. dollars on a certain date, nothing more. A foreign owner could sell his or her bonds, but more than $100 billion worth of these bonds are sold every day. The resale of U.S. bonds by a foreign owner will not affect the U.S. government. In short, there is no economic justification for concern about having a current account deficit and a capital account surplus—nor would there be an economic reason to be concerned about the opposite state of affairs. The important feature of international trade is its potential to improve living standards for people. It is not a game in which current account balances are the scorecard. Key Takeaways • The balance of payments shows spending flowing into and out of a country. • The current account is an accounting statement that includes all spending flows across a nation’s border except those that represent purchases of assets. In our simplified analysis, the balance on current account equals net exports. • A nation’s balance on capital account equals rest-of-world purchases of its assets during a period less its purchases of rest-of-world assets. • Provided that the market for a nation’s currency is in equilibrium, the balance on current account equals the negative of the balance on capital account. • There is no economic justification for viewing any particular current account balance as a good or bad thing. Try It! Use Equation 15.3 and Equation 15.4 to compute the variables given in each of the following. Assume that the market for a nation’s currency is in equilibrium and that the balance on current account equals net exports. 15.2 INTERNATIONAL FINANCE • 503
1. Suppose U.S. exports equal $300 billion, imports equal $400 billion, and rest-of-worldpurchases of U.S. assets equal $150 billion. What is the U.S. balance on current account? Thebalance on capital account? What is the value of U.S. purchases of rest-of-world assets? 2. Suppose Japanese exports equal ¥200 trillion (¥ is the symbol for the yen, Japan’s currency), imports equal ¥120 trillion, and Japan’s purchases of rest-of-world assets equal ¥90 trillion. What is the balance on Japan’s current account? The balance on Japan’s capital account? What is the value of rest-of-world purchases of Japan’s assets? 3. Suppose Britain’s purchases of rest-of-world assets equal £70 billion (£ is the symbol for the pound, Britain’s currency), rest-of-world purchases of British assets equal £90 billion, and Britain’s exports equal £40 billion. What is Britain’s balance on capital account? Its balance on current account? Its total imports?
You've reached the end of your free preview.
Want to read all 747 pages?
- Summer '18