Chapter10 The Balance of Payments

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The Balance of Payments

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Double-Entry Accounting Balance of payments Record of the economic transactions Between the residents of one country and the rest of the world Double-entry accounting system

International transaction Exchange of goods, services, or assets Between residents of one country and those of another2

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Double-Entry Accounting Residents Businesses, individuals, and government agencies That make the country in question their legal domicile

Credit transaction (+) Receipt of a payment from foreigners

Debit transaction (-) Payment to foreigners3

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Double-Entry Accounting U.S. credit transaction (+) Merchandise exports Transportation and travel receipts Income received from investments abroad Gifts received from foreign residents Aid received from foreign governments Investments in the United States by overseas residents4

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Double-Entry Accounting U.S. debit transaction (-) Merchandise imports Transportation and travel expenditures Income paid on the investments of foreigners Gifts to foreign residents Aid given by the U.S. government Overseas investment by U.S. residents

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Double-Entry Accounting Total balance-of-payments account Must always be in balance

Surplus Balance on a subaccount (subaccounts) is positive

Deficit Balance on a subaccount (subaccounts) is negative

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GLOBALIZATION

International payments process

In theory Importers in a country pay the exporters in that same country in the national currency

In reality Importers and exporters in a given country do not deal directly with one another To facilitate payments, banks carry out these transactions

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FIGURE 10.1 International payments process

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Balance-of-Payments Structure Current account of the balance of payments Monetary value of international flows: Transactions in goods, services, income flows, and unilateral transfers

Merchandise trade All of the goods the United States exports or imports Agricultural products, machinery, autos, petroleum, electronics, textiles9

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Balance-of-Payments Structure Merchandise trade balance Credit (+): the dollar value of merchandise exports Debit (-): the dollar value of merchandise imports If negative: merchandise trade deficit If positive: merchandise trade surplus

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Balance-of-Payments Structure Services All the services the U.S. exports or imports

Goods and services balance Services and merchandise trade account If positive: Surplus of goods and services transactions

If negative: Deficit of goods and services transactions

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Balance-of-Payments Structure Goods and services balance Net export of goods and services Positive: Excess exports over imports Add to GDP

Negative: Excess imports over exports Subtracted from GDP

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Balance-of-Pa

yments Structure Income receipts and payments Net earnings (dividends and interest) on U.S. investments abroad Earnings on U.S. investments abroad Minus payments on foreign assets in the U.S.

Compensation to employees

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Balance-of-Payments Structure Unilateral transfers Transfers of goods and services (gifts in kind) or financial assets (money gifts) Between the U.S. and the rest of the world

Private transfer payments Governmental transfers

Current account balance Balance on goods and services Investment income Unilateral transfers14

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Balance-of-Payments Structure Capital and financial account Capital and financial transactions in the balance of payments All international purchases or sales of assets Private-sector and official transactions

Private-sector financial transactions Direct investment Securities Bank claims and liabilities15

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Balance-of-Payments Structure Balance-of-payments statement Credit (+): capital and financial inflows Leads to the home country’s receiving payments from foreigners Export of goods and services

Debit (-): capital and financial outflows Leads to foreigners’ receiving payments Import of goods and services

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Balance-of-Payments Structure Official settlements transactions Movement of financial assets among official holders Official reserve assets Liabilities to foreign official agencies

Statistical discrepancy Errors and omissions Information – some is collected, some is estimated17

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TABLE 10.1 U.S. reserve assets, 2008*

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TABLE 10.2 Selected U.S. liabilities to foreign official institutions, 2008*

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U.S. Balance of Payments 2008, U.S. - merchandise trade deficit Exports < Imports Not popular - adverse consequences on Terms of trade Employment levels Stability of the international money markets

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TABLE 10.3 U.S. balance of payments, 2008 (billions of dollars)*

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