AP Econ Module 41 Capital Flows Balance Payments - Sunny Hills ...

EETililI
The Costas' Financial Year
Purchases or sales
of goods and services
lntorest payments
Loans and deposib
Sources of cash t ses of cash Net
Artichoke sales:
$100,000
lnterest received on
bank account $500
Funds received from
new loan:$25,000
Farm operation and
livinq expens€s: $1 10,000
lnterest paid on
mortgage:$10,000
Funds deposited in
bank $5,500
Total $125,500 $125,500
-$10,000
-$9,500
+$19,500
How could we summarize the Costas' yeat? One way would be with a table like Table
41.1, which shows sources of cash coming in and money going out, characterized
under a few broad headings. The first row ofTable 41.1 shows sales and purchases of
goods and services: sales ofartichokes; purchases ofgroceries, heating oil, that new car,
ald so on. The second row shows interest payments; the interest the Costas received
from their bank account and the inter€st they paid on their mortgage. The third row
shows cash coming in from new borrowing versus money deposited in the balt.
In each row we show the net inflow ofcash from that rype oftransaction. So the net
in the first row is -$10,000 because the Costas sPent $10,000 more than they earned'
The net in the second row is -$9,500, the difference between the interest che Costas received
on their bank account and the interesr they Paid on the mortgage. The net in the
third row is $19,500: the Costas brought in $25,000 udth their new loan but put only
$5,500 ofthat sum in the bank.
The last row shows the sum of cash coming in from all sources and the sum of all
cash used. These sums are equal, by definition: every dollar has a soutce, and every dollar
received gets used somewhere. (What if the Costas hid money under the mattress?
Then that would be counted as another "use" ofcash.)
A country's balance of palT nents accounts summarize its cransactions with the
world using a table similar to the one we just used to summarize the Costas' financial
year.
'fable 4I.2 on the next page shows a simplified version of the U.S. balance of paymenrs
accounts for 2008. 'rX4rere rhe Costa family's accounts show sources and uses of
cash, the balalce of payments accounts show Payments from foreigners-in effect,
sources ofcash for the United States as a whole-and payments to foreigners.
Row 1 of Table 41.2 shows payrnents that arise from sales and purchases ofgoods
and services. For example, the value of U.S. wheat exports and the fees foreigners Pay to
U.S. consulting companies appear in the second column ofrow 1; the value of U.S. oil
imports and the fees American companies pay to Indian call centers-the people who
often answer your 1-800 calls-appear in the third column ofrow 1.
Row 2 showspcfor income-peyrtents for the use offactors ofproduction owned by
residents of other countries. Mostly this means investment income: interest paid on
loans from overseas, the profits of foreign-owned corporations, and so on. For example,
the profits eamed by Disneyland Paris, which is owned by the U.S.-based Walt Disney
Company, appear in the second column of row 2; the profits earned by the U.S.
operations ofJapanese auto comPanies appear in the third column. Factor incorne also
includes labor income. For example, the wages of an American engineer who works
temporarily on a construction site in Dubai are counted in the second column ofrow 2.
Row 3 shows internationdl transfers-funds sent by residents of one counrry to
residents of another, The main element here is the remittances that immigrants,
such as the millions of Mexican-born workers employed in the United Scates,
$o
m 0 d u le 4 l capital Flows and the Balance of Payments 477