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For more information, please see full course syllabus of AP Macroeconomics
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Balance of Payments

  • The Current Account equals the balance of payments on goods and services plus net international transfer payments and factor income
  • When a country imports more than it exports, it generally runs a trade deficit and so the current account is negative
  • When a country exports more than it imports, it generally runs a trade surplus and so the current account is positive
  • The financial account is the difference between a country’s sale of assets to foreigners and its purchases of assets from foreigners from a given period
  • Current Account = -(Financial Account), or Current Account + Financial Account = 0
  • When interest rates are high, capital inflows take place
  • When interest rates are low, capital outflows take place
  • The GNP does not include international factor income
  • GDP is the more accepted tool as the intent was to track production and not income
  • The US, despite low interest rates, takes in capital inflows and in a massive current account deficit, in part, because of a global savings glut

Balance of Payments

Lecture Slides are screen-captured images of important points in the lecture. Students can download and print out these lecture slide images to do practice problems as well as take notes while watching the lecture.

  • Intro 0:00
  • Lesson Overview 0:06
  • Balance of Payments Account 1:01
    • Current Account
    • Sales and Purchases of Goods and Services
    • Factor Income
    • International Transfers
  • Sales, Factor and Transfers 4:13
  • Financial Account 7:58
    • Official Asset Sales and Purchases
    • Private Sale and Purchases of Assets
    • Financial Account
  • Current Account = -Financial Account 12:10
    • Formula
    • What a Country's Financial Account Measures
  • Financial Account and Loanable Supplies 14:30
    • Foreign Direct Investment
    • Exchanges Rates
    • Assume Equilibrium Interest Rate is 4%
  • The Loanable Funds Model: Example 1 15:50
  • The Loanable Funds Model: Example 2 16:49
  • GDP, GNP, and the Current Account 21:33
    • Basic Equation for National Income Accounting
    • Why Doesn't the National Income Equation Use the Current Account as a Whole?
    • Gross National Product Includes International Factor Income
    • Why Do We Use GDP and Not GNP
  • Global Savings Glut 24:07
    • U.S. Entered in a Massive Current Account Deficit
    • U.S. Takes in a Lot of Capital Inflow from the Rest of the World
    • How Did This Happen?
  • Example 1 27:05
  • Example 2 28:10
  • Example 3 30:43
  • Example 4 33:01