Important Concepts

Balance ofpayments:                  The systematicset of accounts that records all economic transactions between residents of acountry and the rest of the world during a given period of time.

Financial account:                      Records the values offinancial assets purchased and sold abroad by private residents (not monetaryauthorities) of the home country. A financial account surplus indicates that,on net, financial capital has flowed into the country.

Capital inflow:                            Either anincrease in foreign assets in the nation, such as when a foreigner purchases aU.S.stock; ora reduction in the nation’s assets abroad, such as when an American sells aforeign stock.

Capital outflow:                          Either an increase inthe nation’s assets abroad, such as when an American purchases a foreign asset;or a reduction in foreign assets in the nation, such as when a foreigner sellshis American assets.

Current account:                        Records the values ofgoods and services sold and purchased abroad, plus net interest and otherfactor payments and net unilateral transfers and gifts. A current accountsurplus shows that a country has positive net foreign investment.

Internationalinvestment           Measures anation’s stock of foreign assets and liabilities at a point
position:                                      intime.

Net foreigninvestment:              The part ofnational saving invested abroad instead of being channeled into domesticcapital formation: (S = I_d + I_f). It is also thedifference between purchases of financial assets (lending) abroad and assetsales to foreigners (borrowing), that is, a country’s accumulation of netclaims on other countries.

Officialsettlements balance:       Also called the“official balance,” this is the sum of the current account balance plus theprivate financial account balance. An imbalance in the official balance must bepaid for through official reserves transactions.

Officialinternational                  The changes indomestic official reserve assets and inreservestransactions:                 domestic officialliquid liabilities to foreign officials. It is derived by dividing privatetransactions from official “accommodative”
                                    transactionsin the balance of payments accounts.

Reserve assets:                            Assets held by anation’s monetary authorities as a kind of “war chest” to enable them tointervene in the foreign exchange market if and when they decide to do so.Reserve assets include key foreign currencies, gold, official reserves at theIMF, and holdings of Special Drawing Rights (SDRs). Recently,Chinahasaccumulated a very large stock of dollar-denominated reserve assets.

Merchandise trade balance:       The value of goods exported (credits)minus the value of goods imported (debits). The value of exported goods and services minus imported goods and services is often referred to as“the trade balance.”