Balance of payments: Capital account | Foreign exchange and trade | Macroeconomics | Khan Academy

Balance of payments: Capital account | Foreign exchange and trade | Macroeconomics | Khan Academy

December 3, 2019 6 By Kody Olson


In the last video, we started
to explore the payments that could flow into a country
or out of a country. And now I want to
continue it more. In particular, we focused on
the current account last time. And that focused on things like
trade, exports and imports, income earned from assets in
another country, or income that someone from
outside of the country earns from assets in the
country that we’re studying, or just transfers
that are happening. Now when we look at
the capital account, in this video right over here–
and I wrote capital accounts, there shouldn’t be
an s right there, when we look at the
capital account, we look at other
ways or other reasons why we might have inflows
or outflows of payments. And in particular,
the capital account is focused on that
the change in assets that either foreigners own
of, in this case, the US, or that US nationals own of
assets that are someplace else. And this little triangle
right over here, that is the Greek letter delta,
just shorthand for change in. So once again, let’s focus
first on the inflows. And when you’re talking
about change in assets, these would essentially be
someone outside the US buying assets inside the US from
someone that was not foreign. So for example, if
I am a home builder, I’m an American citizen,
I’m a home builder, I build a home in the US. And then I sell it,
for a million dollars to a Mexican national, maybe
for their vacation home. That means that for
just that transaction there has been an increase
in foreign ownership of US assets, that
million dollar home. And so this number would be
increased by a million dollars. And so that’s why
it’s an inflow, because when they
bought that house they would have had to
make a payment to me. And this right over
here– I have a bunch of stuff written
over here– change in foreign owned assets in US. And it also includes
financial derivatives there, you don’t have to worry
too much about that. And it also has change
in foreign reserves. The one way to think about
the difference between that and that right
over there, this is you could view this as privately
owned changes in ownership. And this is by essentially
official changes in ownership by either the government
or the Central Banks of foreign countries. And for a lot of
countries they’re essentially one
and the same thing. In the US, they kind of maintain
this pseudo-independence. But this is official,
you could kind of view this as official
government ownership. And this right over here
is, for the most part, private ownership. And once again, if
someone in England were to come into
the US and buy, let’s say buy a share
of IBM from an American, then that would increase
this number right over here. But if the Central Bank of China
decided to buy a US government bond from an American
then this right over here, would increase. But they’re both
the general idea. Someone buys an asset. We’re not talking about
the income on the asset. We’re talking about
the asset itself. Someone buys an asset
from, or changes hands from and American national
to a foreign national, then these numbers
would increase and those foreign
nationals would have to make a
payment into the US. So once again, these are
inflows right over here. Now we take the other
side of that coin. If I were to go out and buy
a vacation home in Italy, and let’s say I buy
it from an Italian, then I would have to
make a payment to them. So that would be an
outflow from the US. And I would get
an asset in Italy, in exchange for it,
my vacation home. And so this number right
over here would increase. But once again, I wrote
over here in orange because it is an outflow. I’m making a payment
to a foreign national. And this once again,
this is a breakdown between– this is really the
private sector for the most part. And this over here is
the US Federal Reserve. So if the US
Federal Reserve were to go and buy an asset
from a foreign government bank or individual,
let’s say a foreign bond, than this number right
over here would increase. And actually, the way I’ve
classified right over here, government purchases, not
the US Federal Reserve, but the US government
actually still falls into this category, just the
way I set up the numbers. This right over here is
the Federal Reserve alone. Now with that of the
way, let’s actually figure out whether we’re
running a capital account deficit or a surplus. So let’s get our
calculator back. Let me get it and I’ll
put it right over here so we can see our numbers. And so let’s think
about the inflow. So this is how much
more foreigners are buying of US stuff. So they’re buying 625–
and when I say stuff, I’m talking about assets. I’m not talking about
goods and services. I’m talking about stocks
and bonds and real estate. So $625 billion. And then plus
another $165 billion if we talk about the official
purchases of governments and central banks. So this is how much
increased asset– this is the change
in assets purchased from foreigners in the US. So they have to put in
$790 billion into 2011 to make those purchases. Well on the other side
of that, Americans went out and bought
$380 billion. And when I write- that’s
just a previous answer. So we have $790 billion,
which is what’s inflowing. And now this is
what’s outflowing. $380 billion to buy
assets in other countries that the non-Federal
Reserve actors do. And then these are the assets
that the Federal Reserve also buys. But those are also
outflows of payments. And we are left
with $394 billion– a positive $394 billion. This is $394 billion larger
than this right over here. So we’re running a
capital account surplus. Let me write that. So we end up with a
capital account surplus, and it shows you how good–
what was it? $394 billion. And so you see that these
numbers are pretty close. And now I’m going to
tell you something, and hopefully in
future videos you’ll understand why this is happening
in a little bit more depth. But these numbers
actually should have been the exact same thing. These numbers
should have actually been the exact
same thing, but we see that they’re off
by about, what is it? They’re off by
about $80 billion. So let me write this down. We have and $80
billion discrepancy. And for most people, that’s
a fairly large discrepancy. But if we’re talking
about an economy the size of the
United States, that’s on the order of
$15 trillion, it’s not that huge of a discrepancy. And you have to think about how
all of this stuff is measured. They have to do surveys. They sample things. They’re getting
all these numbers from all different sources. And so it’s actually
reasonable that you would have some form of
statistical discrepancy. And that’s actually what
this is right over here. This is a statistical
discrepancy. In theory, these numbers
should be the exact amount. If you’re running a current
account deficit then you should have that exact same
amount in the capital account surplus, and vice versa. If you have a capital
account deficit then you would have to be running
a current account surplus. We’ll talk more about
why that makes sense, although I encourage
you to think about it. Think about it
right now, why that makes sense, and the difference
between these numbers. This is just a
statistical discrepancy by the Bureau of
Economic Analysis.