Go with the Flows - The Balancing Act of International Trade

Keynote presentation by Paulina Restrepo-Echavarria

Presentation slides (pdf)

Christopher J. Neely, a vice president in Research, gives a short overview of some past Dialogue with the Fed topics and introduces senior economist Paulina Restrepo-Echavarria.

In her presentation, Restrepo-Echavarria speaks about capital flows, the accounting or financial side of international trade. Her discussion includes how capital flows are measured; how they have evolved over time in the United States; how they can be used to help tell if a country is a net lender or a net debtor; and whether being a net debtor is sustainable.

All of a country's transactions with the world are summarized in what is called its balance of payments. The balance of payments can generally be further classified into one of two subaccounts: the current account, and the capital and financial account. The current account reflects the country's trade in goods and services with other countries along with net investment income and transfers. The capital and financial account includes the country's trade in assets with other countries.

To economists, a trade surplus – when exports exceed imports – is seen as an outflow of financial capital, and a trade deficit – when imports exceed exports – is seen as an inflow of financial capital. If total exports were equal to total imports, these monetary transactions would balance at net zero – in other words, a country would receive as much in financial flows as they paid out in financial flows.

But generally a country's trade balance – exports minus imports – is not zero, and this resulting measurement is widely believed to be one of the most misunderstood economic indicators.

Audience Q&A

After the keynote, Neely, Restrepo-Echavarria and Fernando M. Martin, Research officer, address questions. Questions include: What types of services does the U.S. export? What advantage does the U.S. have because the country’s dollar is a reserve currency? Does the fact that the U.S. dollar is a reserve currency create an artificial demand and inflate its value? Are inaccurate perceptions of trade deficits driving trade wars?