Chat with AIExam 3: China and the United States and the Balance of Payments
Determine the cash flow of the United States and China based on Table 3.3. Then update the data using FRED. Taking a quick approach we can just use current account balances and balance of payments measures for financial and accounting cash flows.
Source for United States: HYPERLINK "http://www.bea.gov/newsreleases/glance.htm" http://www.bea.gov/newsreleases/glance.htm
USD Billions Table 3.3 Table 3.3 China United States China United States 2012 Financial Cash 305.3 470.9 193.1 -410.6 Flow or Current Account Account Cash -347.9 128.3 -410. Flow or Balance of Payments
(39) 
Verified* United States defines current account balance as its overall BOP as well. Implicit in this definition is a 0 capital/financial account balance. Implicit in this assumption is that increased US$ reserve holdings of foreign governments (central banks) which correspond to capital outflows from the United States are reinvested into U.S. securities both those central banks based on optimal portfolio considerations.
Consider the current account balances for China and the United States:
a. Explain the four different ways of looking at a current account deficit.
b. Discuss: If China stopped buying U.S. Treasury bills, the U.S. current account deficit would shrink. Which of the four views of a current account deficit is useful in this context?
(39) Verifieda. i. Definitional Approach: Define current account as the difference between exports and imports.
ii. Absorption Approach: Domestic Supply - Domestic Demand yields GNP - (C+I+G) = Current Account Balance
iii. Sources of Funds - Uses of Funds yields Current Account = Savings - Investment.
iv. Buying more than we sell must mean we have to borrow: Current Account = Change in our External Debt position.
b. Method 4: Current Account = Change in our External Debt position.
Go to FRED (the Federal Reserve Economic Database) and update China's current account balances and foreign exchange reserve holdings both graphically and numerically. Determine the implied value of China's financial account + capital account + errors for the most recent three years.
(39) Verified
Discuss:
a. The balance of payments is a measure of a country's accounting cash flow while the current account is a measure of a country's financial cash flow.
b. In recent years, the United States has had a negative financial cash flow while China has had both a positive financial and accounting cash flow. The opposing balances are related.
c. We should not worry about cash flows for either China or the United States since a country is not a company and having too much or too little cash flow is not important.
(24) Explain why the chapter argues that China's foreign exchange capital structure has been "conservative" in recent decades. Relate this to questions of capital mobility and financial crises.
Discuss this in class in the context of the following notes:
(42) Explain why as a conventional accounting measure, the balance of payments is equivalent to "the statement of cash flows" while for financial valuation purposes the current account is almost the same as "cash flow."
(34) Choose among the four different ways of looking at a current account deficit or surplus and explain why China has run a historically large current account surplus and the United States has historically run a current account deficit.
(33) 
Filters
- Essay(0)
- Multiple Choice(0)
- Short Answer(0)
- True False(0)
- Matching(0)