[Music] hey how you doing it's Mr Clifford this is ACDC Eon 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 accounts and the financial or capital account okay two accounts the best way to explain it 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 $5 billion worth of goods and services to China but they're also importing $5 billion worth of goods and services from China okay so the exports equals the Imports the net exports equals zero right 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 when 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 little more realistic is that the United 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 smar country right then it exports to that country and so they have a trade deficit with China now if 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 that 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 United States is buying more from them than they're buying for us so China has all this United States dollars question is 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 and buy goods and services but they can also buy each other's assets their stocks and their bonds right and so the United States can buy Chinese bonds and stocks or China can buy United States bonds and stocks the question is what's going to happen if China has all this money from their Trade Surplus right the United States dollars they'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 than Americans are going to buy Chinese assets all right and over here inflows are going to be greater than outflows for 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 is 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 than 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 than we're buying other foreign countries 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 it makes sense till next time
