balance-of-trade and related jargons

* balance of payment INCLUDES current-account (ca). [1] has a formula on that.

* When China sells $1B worth goods/services to US, China receives $1B USD and somehow leave that in the national forex reserve. Is that $1B foreign asset? The $1B is like $1B worth of gold in US owned by China?

— “The Economist” story 2009/01/24 —

* US current account (savings BY US – investment BY US)[2] are in deficit since 1992.

** Q9: what does “invest” mean?** A9: see [3]. In a different context, when economists talk about foreigners investing in US, i think it means foreigners spending USD in US, but not for consumption.

** Experts say US had to borrow[A] from abroad or sell[B] assets to pay for the annual deficits. (Why?)** B would decrease America’s Net Foreign Asset position.** Some articles suggest A is the main source; while other articles suggest B. I think the same transaction can be seen as A and B as 2 sides of a coin. [3] gave some examples of such transactions.** experts say this deficit was used to “finance” some “investment”, though [3] also says US sells assets (B) to “finance” the CA deficit. I guess that “investment” includes investment in biz, R&D, real estate…** experts widely believe China consumer save hugely, and their savings somehow compensate for the low savings of American consumers.

** Q7: how does “foreign SAVERS” and their money play a role?** A7: I guess they buy US properties, gov bonds, and lend to US businesses. Does exporting to US count as “investment” BY foreign savers?** Q8: in the economists eyes, Chinese savers save in USD or CNY?** A8: Neither. I think by “saver” the economists mean “China does not import so much American goods, so they earn more USD than they spend”. The surplus USD must go somewhere. I guess it mostly goes to buying/investing in US assets, which economists call “borrowing-by-US-from-China”

** Q: what does “borrow” mean? who? in what currency? I think economists mean something else

— digestibles —

* A higher savings rate generally corresponds with a trade surplus. China vs US.

* current accoutn includes balance-of-trade (bot) as the biggest component.* * Because exports generate positive net sales, and because the trade balance is typically the largest component of the current account, a current account surplus is usually associated with positive net exports.

* The net foreign asset (NFA) position of a country is the value of the assets that country owns abroad, minus the value of the domestic assets owned by foreigners.

* if a country runs a $700 billion current account deficit, it has to borrow exactly $700 billion from abroad to finance the deficit and therefore, the country’s net foreign asset position falls by $700 billion. Why? Here’s my theory. Suppose US buys $700B worth of Chinese goods/services. US must pay $700B, but US doesn’t earn that much from export to China. Mostly US sells its own assets to China to get that $700B.

* If an annual current account is a surplus of $2T, the country’s net foreign asset (NFA) position increases by that amount $2T.

* US trade deficit — Warren Buffett said “the rest of the world owns $3 trillion more of us than we own of them”, echoing [3]. I think this means over the years, accommulative US trade deficit adds up to $3T and that’s the US asset under foreign ownership.

— References —

[1] http://en.wikipedia.org/wiki/Balance_of_payments[2] explained in 2009/01/24 The Economist, but why is this definition so different from balance-of-trade?[3] http://www.dollarsandsense.org/archives/2004/0304dollar.html

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