Global economics and the balance of payments. Now, balance of payments. It's essentially accounting, but it's accounting on a country to country basis. And just like corporate accounting, we have inflows, or credits, and outflows, which are debits. Credits include the value of exports or income on US investments abroad. And the opposite is true for debits. It's the value of imports or income on foreign investments in the US. Now, each transaction is recorded in the principles of double-entry bookkeeping, meaning that there is an equal amount involved on each side of the equation. For example, if someone in the US buys a Chinese product, imported from China, the purchase is a debit to the US account and a credit, an inflow, to the Chinese account. If, on the other hand, a Brazilian company sends an interest payment on a loan to a bank in the US, the transaction is a debit, an outflow, to Brazil and a credit to the US, 'cause it's an inflow of payment to the US account. Now the sum of both sides of the balance of payments should always be equal, should always be the same. However, there's no bookkeeping requirement or rule that the sums of individual sub-sectors within each side have to also be equal. And that's why you'll hear the phrase called surpluses, or deficits, within the balance of payments. And these surpluses or deficits are of large importance to analysts and the government as they evaluate an economy. Now to understand how these deficits or surpluses are created, we need to dig down into the components of balance of payments. And the components are broken into three different categories. First the current account, which is the goods and services in and out of a country. The capital account, which captures the flows related to the purchase or sale of non-financial assets that are primarily used for production. And the financial account captures the money flows for financial assets, such as stocks and bonds. Now in theory, these accounts should balance. Meaning that the sum of the payments for each account should be offset by the other two and vice versa. For example, when the US buys more goods and services than it sells, it creates a current account deficit. It must finance that difference by either borrowing or selling more financial or capital assets than it buys, creating either a surplus on the capital account or the financial account, to offset the deficit in the current account. Now a country with a persistent current account deficit is therefore effectively exchanging financial capital or capital assets for those goods and services. And this is what we call a trade deficit or trade surplus. It's when there is an imbalance in the current account that's offset by either the capital account or the financial account. Now most countries attempt to export more goods and services than they import, in order to create a trade surplus. However, it's not uncommon to see a trade deficit in a country's current account, and US is an example. Now there's often a debate on how a trade deficit could be a positive or a negative for the economy, both in the short run and in the long run. For example, many will see a trade deficit as a country not being able to produce enough goods and services for its residents. However, an opposing view might see it as a deficit means that a country's consumers are very wealthy and wealthy enough to purchase more goods than the country produces. So obviously two different viewpoints there. Now, in the long run, many economists, many analysts would say that a trade deficit leads to the creation of fewer jobs in that domestic economy. And how would that happen? Well, if a country is importing more goods from foreign companies, because prices are cheaper for example, prices will go down in the US and domestic companies may be unable to produce and compete at these lower prices, resulting in layoffs, warehouse closes, factory closings, et cetera. Now here in the US, manufacturing jobs, for example, have been hardest hit over the last several decades, as the US consumer tends to favor lower cost, foreign-imported products. Now others may argue that this short term friction in jobs and employment is just temporary, as these folks transition to other industries and other sectors that better fit the trade environment. And meanwhile, while that's happening, consumers of the domestic country are benefiting from the efficiencies of trading.
