What is Balance of Payments and BoP Surplus and Deficit? Video Lecture | Macroeconomics- Learning and Analysis

wait fabulous mr. Clifford this is a
ac/dc econ we're talking about a key
concept in macroeconomics it's called
the balance of payments okay a bunch of
students get confused on this I'm going
to simplify it so you understand the big
picture what you're going to learn about
is two different accounts something
called the current account and the
financial or capital account hey two
accounts the best way explain is with an
example I've got two countries United
States and China and there's no trade
surplus there's no trade deficit let's
say United States is exporting five
billion dollars worth of goods and
services to China but they're also
importing five million dollars worth of
goods and services from China okay so
the export equals the imports the net
exports equals zero and that introduces
the idea of the current account the
current account has to do with goods and
services between countries the one you
normally see in the newspaper they talk
about trade deficit or trade surplus is
the current account the current account
also includes things called net
investment income and net transfers but
that's not as important okay you'll
learn those things too instead of saying
that exports and imports equal let's say
what's more realistic is that the I
States imports a whole lot more than it
exports from China in that situation is
a trade deficit or a trade surplus the
answer is a trade deficit a trade
deficit is when a country imports more
things from other country right then it
exports to that country and so they have
a trade deficit with China now the
United States has a trade deficit with
China China must have a trade surplus
with the United States and so that means
they're exporting more than they're
importing from the United States if the
United States has a trade deficit with
China what it means is they're spending
all this money to buy those imports
right and China uses some of that money
to buy United States imports but still
the nice thing is buying more from them
than they're buying for us so China has
all this United States Dollars questions
what do they do with those dollars bring
in boom the financial account or the
capital account okay the financial
account looks at assets between
countries so countries can turn around
by gutten services but it can also buy -
there's assets there stocks in there
bonds right and so the United States can
buy Chinese bonds and stocks or try to
combine United States bonds and stocks
the question is what's going to happen
if China has all
money from their trade surplus right the
United States dollars we're going to
turn around and they're going to buy
American assets and so in the financial
account outflows are going to be greater
than inflows in other words China is
going to spend more money on United
States assets then Americans are going
to spy Chinese assets all right and over
here inflows are going to be greater
than outflows the United States now I
want you to take a look at this graph
this graph right here shows the basic
idea notice that over all the years the
United States had a trade deficit or a
current account deficit that was offset
by the fact they had a capital account
surplus this concept right here
sometimes called net capital outflows
right in China the net capital outflows
is positive which means China is
spending more money on buying foreign
assets then other people are buying
Chinese assets over here the net capital
outflow for the United States is
negative right the United States has
more countries buying their assets then
we're buying other foreign country's
assets so if you have a trade deficit in
the current account you're going to have
a financial account surplus with more
money coming into your country the same
thing over here if China has a current
account surplus they're going to have a
financial account deficit hopefully make
sense until next time