<p>I have not studied BOP well, but as far as i can understand, there is a mismatch between BOP and macroeconomics terminologies. In BOP we say that capital outflow (inflow) occures when finacial account is greater (smaller) than zero i.e. increase in residents abroad assets is greater (smaller) than increase in liabilities to non-residents. On the other hand, in macro (for example in IS-LM-BP) we say that we have capital outflow when bank deposits denominated in domestic currency moves abroad conducted by exchange of domestic curency in case of decrease of monetary policy rate.</p>
<p>Imagine now that for example that we have BOP for US made in euros and:</p>
<ol>
<li>US exporter has sold some goods for 100 EU bank deposit in European bank;</li>
<li>US importer has bought some goods in exchange for dollar deposit in US bank valued as 22\$ (or 20 euro by current exchange rate);
In that case our BOP is:
<a href="https://i.sstatic.net/SojF7.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/SojF7.png" alt="enter image description here" /></a></li>
</ol>
<p>Imagine now that afterwards some EU company decided to sell 22$ deposit in US bank for euros. In that case our US liabilities decrease and assets also does so since we need to exchange dollars for euro. Our BOP is now:
<a href="https://i.sstatic.net/jdh0t.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/jdh0t.png" alt="enter image description here" /></a></p>
<p><strong>In terms of BOP we have no increase in capital outflow</strong> since our FA is still equal to 80. But <strong>in terms of IS-LM-BP we have capital outflow</strong>. Because Eu company withdrew its assets from our economy. Can you please tell me where is my mistake. Thanks in advance.</p>
<hr />
<p>Edit: Thank you for your comment. I opened a Mankiw 7th edition textbook to read, what he calls a capital inflow and outflow. On page 123 Mankiw wrote:</p>
<blockquote>
<p>the flow of capital can
also take the form of foreigners buying domestic assets, such as when a citizen of
Germany buys stock from an American on the New York Stock Exchange.</p>
</blockquote>
<p>If i understood the idea of Mankiw correctly, he means that if German citizen firstly buy 10 dollars for euros and then exchange this 10 dollars for a stock, then there will be capital inflow. But again, in terms of BOP purchase of dollars for euro will simultaneously increase the liabilities of our country to non-residents (since we gave 10 dollars to non-resident) and increase our abroad assets (by some amount of euro which are liabilities of EU CB (if we talk about cash) and hence abroad assets of residents). This is why our Financial Account will be unchanged while there will be capital inflow in terminology of Mankiw. This is what i cannot understand pretty hard.</p>

CC BY-SA 4.0
2020-07-10T10:13:35.297Z
Personally I would not describe the EU company purchasing Euros from the US bank as a capital outflow (it is in effect balanced by the US company purchasing Dollars which might count as a capital inflow).  Depending on whose liability the Dollars originally were, it might reduce US money supply in the same way that ordinary  repayment of loans do.
Henry
CC BY-SA 4.0
2020-07-10T16:34:00.893Z
Thank you for commenting. I guess that one way to move capital through border is to exchange it to other currency asset. This is why as i can understand in IS-LM we talk about capital outflow when non-residents deposits move abroad causing exchange rate depreciation that stimulates export, money demand and etc.
Maksim Tarasenko
<balance-of-payments><capital-mobility>
Gap between BOP and macroeconomic terminologies (In my opinion)
Maksim Tarasenko
# Gap between BOP and macroeconomic terminologies (In my opinion)

(Asked by: username_0 on 2020-07-09)

I have not studied BOP well, but as far as i can understand, there is a mismatch between BOP and macroeconomics terminologies. In BOP we say that capital outflow (inflow) occures when finacial account is greater (smaller) than zero i.e. increase in residents abroad assets is greater (smaller) than increase in liabilities to non-residents. On the other hand, in macro (for example in IS-LM-BP) we say that we have capital outflow when bank deposits denominated in domestic currency moves abroad conducted by exchange of domestic curency in case of decrease of monetary policy rate.

Imagine now that for example that we have BOP for US made in euros and:

1. US exporter has sold some goods for 100 EU bank deposit in European bank;
2. US importer has bought some goods in exchange for dollar deposit in US bank valued as 22\$ (or 20 euro by current exchange rate);
   In that case our BOP is:
   [![enter image description here](https://i.sstatic.net/SojF7.png)](https://i.sstatic.net/SojF7.png)

Imagine now that afterwards some EU company decided to sell 22$ deposit in US bank for euros. In that case our US liabilities decrease and assets also does so since we need to exchange dollars for euro. Our BOP is now:
[![enter image description here](https://i.sstatic.net/jdh0t.png)](https://i.sstatic.net/jdh0t.png)

**In terms of BOP we have no increase in capital outflow** since our FA is still equal to 80. But **in terms of IS-LM-BP we have capital outflow**. Because Eu company withdrew its assets from our economy. Can you please tell me where is my mistake. Thanks in advance.

---

Edit: Thank you for your comment. I opened a Mankiw 7th edition textbook to read, what he calls a capital inflow and outflow. On page 123 Mankiw wrote:

> the flow of capital can
> also take the form of foreigners buying domestic assets, such as when a citizen of
> Germany buys stock from an American on the New York Stock Exchange.

If i understood the idea of Mankiw correctly, he means that if German citizen firstly buy 10 dollars for euros and then exchange this 10 dollars for a stock, then there will be capital inflow. But again, in terms of BOP purchase of dollars for euro will simultaneously increase the liabilities of our country to non-residents (since we gave 10 dollars to non-resident) and increase our abroad assets (by some amount of euro which are liabilities of EU CB (if we talk about cash) and hence abroad assets of residents). This is why our Financial Account will be unchanged while there will be capital inflow in terminology of Mankiw. This is what i cannot understand pretty hard.

**Tags:** balance-of-payments, capital-mobility

> **Comments:**
> **username_1**: Personally I would not describe the EU company purchasing Euros from the US bank as a capital outflow (it is in effect balanced by the US company purchasing Dollars which might count as a capital inflow).  Depending on whose liability the Dollars originally were, it might reduce US money supply in the same way that ordinary  repayment of loans do.  
> **username_0**: Thank you for commenting. I guess that one way to move capital through border is to exchange it to other currency asset. This is why as i can understand in IS-LM we talk about capital outflow when non-residents deposits move abroad causing exchange rate depreciation that stimulates export, money demand and etc.  

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## 0 answers

