The Balance of Payments and Exchange Rate

Abstract

In our open economies, domestic residents can engage in a variety of international transactions involving the purchase or sale of goods, services, and assets. US residents buy European cars and US airplane manufacturers sell commercial jets to Australian airlines. Vineyards in California purchase the services of Mexican workers, while American universities sell their educational services to Saudi Arabian students. At the same time, US investors open Swiss bank accounts, and US multinational corporations are raising funds by selling stocks and bonds to foreign investors (Chinese and Japanese). These are the legal transactions that the balance of payments (BoP) intends to register. BoP accounts are an accounting record of all monetary transactions that have taken place during a given period between a country and the rest of the world.¹