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International Economics
By Robert J. Carbaugh
7th Edition
Chapter 11:
The balance of payments
Copyright ©2000, South-Western College Publishing
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
2
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
Carbaugh, Chap. 11
3
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
Carbaugh, Chap. 11
4
Structure of the Balance of Payments
Current account
Goods and services balance
Merchandise trade balance
Services balance
Investment income
Unilateral transfers
Private transfer payments
Governmental transfers
Carbaugh, Chap. 11
5
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
Carbaugh, Chap. 11
6
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)
Carbaugh, Chap. 11
7
Balance of Payments
US Balance of Payments, 1997 ($ bill.)
Current account
Merchandise trade
exports
$678.3
imports
-877.2
Net
Services
military trans. (net)
3.8
other services, net
81.5
All services, net
Balance on goods & services
Investment income, net
Carbaugh, Chap. 11
-198.9
85.3
-113.6
-14.3
Cont’d.
8
Balance of Payments
US Balance of Payments, 1997 ($ bill.)
Current account (cont’d)
Unilateral transfers
US government grants
-11.6
US govt pensions, and
other transfers
-4.2
Private remittances and
other transfers
-22.8
All transfers, net
-38.6
Balance on current account
$-166.5
Carbaugh, Chap. 11
9
Balance of Payments
US Balance of Payments, 1997 ($ bill.)
Capital account
Changes in US assets abroad, net
US official reserve assets -1.0
other US govt assets
0.2
US private assets
-426.1
All changes, net
-426.9
Changes in foreign assets in the US, net
foreign official assets
18.2
foreign private assets
672.3
All changes, net
690.5
Allocation of SDRs
0
Statistical discrepancy
-97.1
Balance on capital account
166.5
Carbaugh, Chap. 11
10
Balance of Payments
($ bill.)
US Balance of Payments 1970-97
100
50
0
Merchandise
trade balance
-50
Services
balance
-100
Current
account
balance
-150
-200
70 72 74 76 78 80 82 84 86 88 90 92 94 95 97
Carbaugh, Chap. 11
11
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
12