Module Capital Flows and the Balance of Payments KRUGMAN'S MACROECONOMICS for AP* 41 Margaret Ray and David Anderson What you will learn in this Module : The meaning of the balance of payments accounts The determinants of international capital flows What you will learn in this Module : Balance of Payments Accounts Balance of Payments Accounts Current Account Net Exports Trade Balance Factor Income Transfers Financial Account Current/Financial Relationship Modeling the Financial Account Modeling the Financial Account Savings will flow toward higher returns r% Q LF USA S LF USA D LF Japan r% Q LF Japan S LF Japan D LF China S LF 1 USA S LF 1 Japan Debit to the US Financial Account or Capital Outflow Credit to the Japanese Financial Account or Capital Inflow Underlying Determinants of International Capital Flows Underlying Determinants of International Capital Flows Differences in economic growth rates Differences in savings rates Two-way Capital Flows Two-way Capital Flows Capital moves in both directions Differences in individual investor's incentives Financial specialization Countries can be both creditors and debtors simultaneously Table 41.1 The Costas Financial Year Ray and Anderson: Krugmans Macroeconomics for AP, First Edition Copyright 2011 by Worth Publishers Figure 41.2 The Loanable Funds Model Revisited Ray and Anderson: Krugmans Macroeconomics for AP, First Edition Copyright 2011 by Worth Publishers Figure 41.3 Loanable Funds Markets in Two Countries Ray and Anderson: Krugmans Macroeconomics for AP, First Edition Copyright 2011 by Worth Publishers Figure 41.4 International Capital Flows Ray and Anderson: Krugmans Macroeconomics for AP, First Edition Copyright 2011 by Worth Publishers Figure 41.1 The Balance of Payments Ray and Anderson: Krugmans Macroeconomics for AP, First Edition Copyright 2011 by Worth Publishers