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AP Economics

AP Economics. Mr. Bernstein Module 41: Capital Flows and the Balance of Payments March 2019. AP Economics Mr. Bernstein. Capital Flows and the Balance of Payments Objectives - Understand each of the following: The meaning of the balance of payments accounts

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AP Economics

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  1. AP Economics Mr. Bernstein Module 41: Capital Flows and the Balance of Payments March 2019

  2. AP EconomicsMr. Bernstein Capital Flows and the Balance of Payments Objectives - Understand each of the following: • The meaning of the balance of payments accounts • The determinants of international capital flows

  3. AP EconomicsMr. Bernstein Balance of Payments Accounts • Summary of a country’s transactions with other countries • Current Account + Capital Account = 0…(may be a statistical gap) • Why? All sources of cash must equal all uses of cash • Current Account • Net Exports, Trade Balance, Transfers, Factor Income • Creates no liabilities • Capital Account • Purchase or sale of assets • Creates liability • AKA Financial Account

  4. AP EconomicsMr. Bernstein Balance of Payments Example

  5. AP EconomicsMr. Bernstein Modeling the Capital Account • Savings will flow toward the higher return • Real rates are higher in Japan • Through using Loanable Funds model, flows can be any financial asset ...(not physical) • US is exporting dollars and importing JPY financial assets • Continues until interest rate parity exists • Ignores FX changes

  6. AP EconomicsMr. Bernstein Modeling the Capital Account • Savings will flow toward the higher return

  7. AP EconomicsMr. Bernstein International Capital Flows • Driven by: • Differences in Growth Rates • Rapidly growing economy, ie China currently, typically offers more investment opportunities than a slowly growing economy and therefore has higher demand for capital inflows • Differences in Savings Rates • Higher private savings rates, ie Japan, increases supply of funds and reduces demand for capital inflows • Government deficits reduce savings and can lead to increased demand for capital inflows (ie USA?) • Is the sum of a two-way flow of many individuals & firms

  8. AP EconomicsMr. Bernstein Example question • How will the following be categorized in US balance of payments accounts? How will current and capital accounts change? • US student takes university courses in Australia • German firm buys microprocessors from US firm

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