Money, Banking, and International Financedeficit item or negative because money is leaving the United States. Several examples of deficit
items include a U.S. resident buys imported goods, sends money to relatives in foreign
countries, or travels abroad. A country’s residents or government receiving money for
transactions is a surplus item, and the number is positive because money enters the United
States. Several examples of surplus items include U.S. firm exports goods to another country.
U.S. residents receive money from foreigners, or foreigners travel to the United States.
Current account summarizes the purchases and sales of goods and services between the
United States and the rest of the world. The first item is the trade balance, which equals total
exports minus total imports, and it is usually the largest item. If the trade balance is positive,
then more money flows into the country than leaves because money moves in the opposite
direction of goods and services. If the trade balance is negative, subsequently, more money
flows out of the country than in as the country buys more products and services from the world.
Furthermore, the current account includes the items for shipping, brokerage, and insurance for
the ships and airplanes that deliver the cargo. Then economists add investment income to the
current account. We must be careful because investments are financial transactions that
economists record under the financial account. However, economists record the income from
those investments under the current account. Finally, the current account includes unilateral
transfers between nations such as foreign aid, private gifts, and money sent to relatives living in
another country.
For the United States, the current account balance equaled -$465.9 billion in 2011. Current
account is negative because more money left the United States than entered, causing a current
account deficit. Subsequently, the United States finances this deficit by borrowing from
foreigners. Current account deficit is large because the United States imported more goods than
exported. The U.S. trade balance was -$ 494 .7 billion in 2011.
Financial account equaled $555.1 billion in 2011, and it records all transactions for stocks,
bonds, and real estate between the United States and the rest of the world. If the financial
account is positive, then more money flowed into the United States than left, called a financial
inflow. Consequently, the United States borrows from foreigners because they invested more
assets in the United States than the amount the U.S. residents bought foreign assets. If the
financial account is negative, then more money is flowing out of the United States than flowing
in, called a capital outflow. Thus, a country is lending to foreigners because the value of foreign
assets bought by residents exceeds the amount of assets foreigners bought inside the country.
The U.S. businesses, for instance, bought $483.7 billion in foreign stocks, bonds, and real
estate while foreigners bought $1,001. 0 billion of financial and property assets within the United
States. Furthermore, approximately $39.0 billion flowed into the United States for purchasing of
financial derivatives. Finally, the capital account experienced a net outflow of a negative $ 1 .2
billion. Capital account represents the purchase of assets used in manufacturing and production,
and the production has not started yet. For example, a U.S. firm buys a coalmine in a foreign
country, and it has not started to extract coal yet. Then economists record this transaction under
the capital account.
If a country has a current account deficit, then a financial surplus finances this deficit. For
example, the United States has operated current account deficits for the last 45 years. It imports