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