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The Balance of Payments
The Balance of Payments
The Balance of
Payments
The Balance of Payments
• This is the net balance of capital dispersed from and into the
U.S. for the purpose of exerting control over assets.
• Foreign direct investment arises from 10% ownership of
voting shares in a domestic firm by foreign investors.
• The source of concern over foreign investment in any country
focuses on two topics: control and profit.
• Some countries possess restrictions on what foreigners may
own in their country.
• The general rule or premise is that domestic land, assets and
industry should be owned by residents of the country.
• Concerns over profit stem from the same argument.
• This is the net balance of capital that flows in and out of the
U.S. but does not reach the 10% threshold of direct
investment.
• The purchase of debt securities across borders is classified as
portfolio investment because debt securities by definition do
not provide the buyer with ownership or control.
• Portfolio investment is motivated by a search for returns
rather than to control or manage the investment.
• As illustrated in Exhibit 4.4, portfolio investment has shown
much more volatile behavior than net foreign direct
investment over the past decade
C = consumption spending
I = capital investment spending
G = government spending
X = exports of goods and services
M = imports of goods and services
X – M = the current account balance
Where:
X = exports of goods and services
M = imports of goods and services Current Account Balance
CI = capital inflows
CO = capital outflows Capital Account Balance
FI = financial inflows
FO = financial outflows Financial Account Balance
FXB = official monetary reserves
• Managed Floats
– Countries operating with a managed float often find it
necessary to take action to maintain their desired
exchange rate values