What you will learn
in this Module:
410 section 8 The Open Economy: International Trade and Finance
Module 41
Capital Flows and the
Balance of Payments
Capital Flows and the Balance of Payments
In 2008, people living in the United States sold about $3.5 trillion worth of stuff to
people living in other countries and bought about $3.5 trillion worth of stuff in return.
What kind of stuff? All kinds. Residents of the United States (including employees of
firms operating in the United States) sold airplanes, bonds, wheat, and many other
items to residents of other countries. Residents of the United States bought cars,
stocks, oil, and many other items from residents of other countries.
How can we keep track of these transactions? Earlier we learned that economists
keep track of the domestic economy using the national income and product accounts.
Economists keep track of international transactions using a different but related set of
numbers, the balance of payments accounts.Balance of Payments Accounts
A country’s balance of payments accountsare a summary of the country’s transac-
tions with other countries.
To understand the basic idea behind the balance of payments accounts, let’s con-
sider a small -scale example: not a country, but a family farm. Let’s say that we know the
following about how last year went financially for the Costas, who own a small arti-
choke farm in California:
■ They made $100,000 by selling artichokes.
■ They spent $70,000 on running the farm, including purchases of new farm machin-
ery, and another $40,000 buying food, paying utility bills for their home, replacing
their worn -out car, and so on.
■ They received $500 in interest on their bank account but paid $10,000 in interest on
their mortgage.
■ They took out a new $25,000 loan to help pay for farm improvements but didn’t use
all the money immediately. So they put the extra in the bank.- The meaning of the balance
of payments accounts - The determinants of
international capital flows
Robin MacDougall/Robin MacDougall
A country’s balance of payments
accountsare a summary of the country’s
transactions with other countries.