Transcript Carbaugh, International Economics 9e, Chapter 11

International Economics
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
Carbaugh, Chap. 11
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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
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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
Carbaugh, Chap. 11
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The Balance of Payments
Double-entry accounting (cont’d)
 Debit transactions lead to payments to foreigners
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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
Carbaugh, Chap. 11
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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
Carbaugh, Chap. 11
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Structure of the Balance of Payments
Capital and financial account
 All purchases or sales of assets, including:
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Direct investment
Securities (debt)
Bank claims and liabilities
Official settlements transactions
Carbaugh, Chap. 11
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Current account
Current account surplus and deficit
 Current account and capital & financial 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)
Carbaugh, Chap. 11
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Balance of Payments
US Balance of Payments, 2001 ($ bill.)
Current account
Merchandise trade
exports
$720.8
imports
-1,147.4
Net
Services
Travel & transport recpts. 13.4
other services, net
65.4
All services, net
Balance on goods & services
Carbaugh, Chap. 11
-426.6
78.8
-347.8
Cont’d.
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Balance of Payments
US Balance of Payments, 2001 ($ bill.)
Current account (cont’d)
Income receipts & payments
investment income, net
-13.7
employee compensation
-5.4
All income, net
-19.1
Unilateral transfers, net
-50.5
Balance on current account
Carbaugh, Chap. 11
$-417.4
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Balance of Payments
US Balance of Payments, 2001 ($ bill.)
Capital & financial account
Capital account transactions, net
0.7
Financial account transactions, net 455.8
Statistical discrepancy
-39.1
Balance on capital &
financial account
$417.4
Carbaugh, Chap. 11
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Balance of Payments
US Balance of Payments 1970-2001
Carbaugh, Chap. 11
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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 macroeconomic 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
Carbaugh, Chap. 11
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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
Carbaugh, Chap. 11
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