the balance of payments
TRANSCRIPT
International EconomicsBy Robert J. Carbaugh
8th Edition
Chapter 11:
The Balance of Payments
The Balance of Payments
Balance of Payments
• A record of international transactions between residents of one country and the rest of the world
• International transactions include exchanges of goods, services or assets
• “Residents” means businesses, individuals and government agencies, including citizens temporarily living abroad but excluding local subsidiaries of foreign corporations
The Balance of Payments
Double-entry accounting in the BOP
• All transactions are either debit or credit transactions
• Credit transactions result in receipt of payment from abroad– Merchandise exports– Transportation and travel receipts– Income received from investments abroad– Gifts received from foreign residents– Aid received from foreign governments– Local investments by overseas residents
The Balance of Payments
Double-entry accounting (cont’d)
• Debit transactions lead to payments to foreigners– Merchandise imports– Transportation and travel expenditures– Income paid on investments of foreigners– Gifts to foreign residents– Aid given by home government– Overseas investments by home country residents
• Each credit transaction has a balancing debit transaction, and vice versa, so the overall balance of payments is always in balance
Structure of the Balance of Payments
Current account
• Goods and services balance– Merchandise trade balance
– Services balance
• Investment income (net)
• Unilateral transfers– Private transfer payments– Governmental transfers
Structure of the Balance of Payments
Capital account
• All purchases or sales of assets, including:– Direct investment
– Securities (debt)– Bank claims and liabilities– Official settlements transactions
Current account
Current account surplus and deficit
• Current account and capital account balance each other; when one is in surplus the other must be in deficit
• Current account surplus means exports of goods and services, investment income and transfers exceed imports and outflows
• Current account deficit means imports of goods and services, and outflows are greater than exports and inflows; must be financed by borrowing (capital account inflows)
US Balance of Payments, 1999 ($ bill.)
Balance of Payments
Current account
Merchandise tradeexports $683.0imports -1,030.1Net -347.1
ServicesTravel & transport recpts. 5.3other services, net 74.3All services, net 79.6
Balance on goods & services -267.5Cont’d.
US Balance of Payments, 1999 ($ bill.)
Balance of Payments
Current account (cont’d)
Income receipts & paymentsinvestment income, net -19.1employee compensation -5.7All income, net -24.8
Unilateral transfers, net -46.6
Balance on current account $-338.9
US Balance of Payments, 1999 ($ bill.)
Balance of Payments
Capital accountChanges in US assets abroad, net
US official reserve assets $8.7other US govt assets -0.4US private assets -381.0All changes, net -327.7
Changes in foreign assets in the US, netforeign official assets 44.6foreign private assets 706.2All changes, net 750.8
Allocation of SDRs 0
Statistical discrepancy -39.2
Balance on capital account $338.9
US Balance of Payments 1970-99
Balance of Payments
Balance of Payments
Current account deficit a problem?
• Current account deficit has little to do with foreign trade practices or competitiveness
• Determined mostly by domestic macro-economic conditions that cause demand to exceed supply and increase imports (paid for with borrowing)
• Whether a current account deficit is good or bad depends on whether the borrowed funds are used to pay for consumption or investment
Balance of Payments
Balance of international indebtedness
• Summarizes one nation’s overall quantity of assets and liabilities against the rest of the world
• Shows whether the nation is a net debtor or a net creditor
• Indicates sensitive items, such as short term debt held by foreigners which could be liquidated quickly, straining finances
