Can someone explain why in the current account and capital account a number which PROVIDES FOREIGN currency to the US has a plus sign (and a negative sign for the opposite)? If foreigners pay for our exports with USD, would this not be a receipt of USD? (buy USD to pay us) If so, why are exports a positive number in the current account representing a provision of FOREIGN currency? p.617-618 CFAI book 1 thanks a lot guys.
Hey, not sure if I remember this correctly but i’m fairly sure this should answer your question… Just simply follow your own writing where you capitalized “PROVIDE”… Exports for a country are when foreigners buy from our country, so you RECEIVE the currency…it is a positive Imports are a negative following the same logic…you are paying, therefore need to subtract the totals… isn’t this the same idea as with GDP where it’s X-M (where x = exports and m = imports)… Anyway this helps, not sure if it makes sense or is actually correct
yeah, i follow the logic, but why would we receive foreign currency when X>M if people buying our exports pay us in domestic currency?
The way I understand trade is like this DC = USD and FC = all other currencies when you export you recieve FC and when you import you pay DC So when you have a surplus (X>M) then there is a net inflow of FC You enter into forward contracts to hedge the currency risk and convert the FC into DC.
Thanks Nomad, I see how that works. But, if we look on page 600 of the CFA text it says that we receive DC for exports…this is where I get confused
Say you live in Iceland and want to buy a GM car. To buy our exports you pay GM in USD, but first you must buy USD…we (think of “we” as “the country”) sell USD FOR foreign currency. When we SELL USD we are BUYING foreign currency. So our exports are ultimately a SOURCE of foreign currency. GM gets the USD that was PAID FOR with foreign currency. Hope this helps.