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Balance of Payments. Keep track of international transactions between residents of a country and the rest of the world International transactions include exchanges of goods, services and assets (bank deposits,stocks,bonds,real estate,factories)
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Balance of Payments Keep track of international transactions between residents of a country and the rest of the world International transactions include exchanges of goods, services and assets (bank deposits,stocks,bonds,real estate,factories) Residents of a country include citizens who are temporarily living abroad and foreign-owned enterprises that have a facility in the country • Although a corporation is considered to be a resident of the country in which it is incorporated, its overseas branch or subsidiary is not. ??? Carbaugh, International Economics Carbaugh, Chap. 11
The Balance of Payments • 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 foreign residents Carbaugh, Chap. 11
The Balance of Payments • Debit transactions lead to payments to foreigners • Merchandise imports • Transportation and travel expenditures • Income paid on investments of foreigners • Gifts to foreigners (residents of other lands) • Foreign aid given by home government • Overseas investments by home country residents Carbaugh, Chap. 11
Structure of the Balance of Payments Current account: payment for currently produced goods and services • Goods and services balance • Merchandise trade balance • Services balance • Investment income (net) • Paid for “capital services” • Unilateral transfers • Private transfer payments • Governmental transfers Carbaugh, Chap. 11
Structure of the Balance of Payments Capital account • All purchases or sales of assets, including: • Direct investment • Securities (debt) … “Portfolio investment” • Bank claims and liabilities • Official settlements transactions Carbaugh, Chap. 11
Current account surplus and deficit • Current account and capital account balance each other. • The balance of payments “balances” C + I + G + (X – Im) = Y = T + S + C Trade deficit is matched by capital inflows • (Im – X) = (I – S) + (G – T) Capital In = National Borrowing Carbaugh, Chap. 11
Balance of Payments US Balance of Payments, 1999 ($ bill.) Current account Merchandise trade exports $683.0 imports -1,030.1 Net -347.1 Services Travel & transport recpts. 5.3 other services, net 74.3 All services, net 79.6 Balance on goods & services -267.5 Cont’d. Carbaugh, Chap. 11
Balance of Payments US Balance of Payments, 1999 ($ bill.) Current account (cont’d) Income receipts & payments investment income, net -19.1 employee compensation -5.7 All income, net -24.8 Unilateral transfers, net -46.6 Balance on current account $-338.9 Carbaugh, Chap. 11
Balance of Payments US Balance of Payments, 1999 ($ bill.) Capital account Changes in US assets abroad, net US official reserve assets $8.7 other US govt assets -0.4 US private assets -381.0 All changes, net -327.7 Changes in foreign assets in the US, net foreign official assets 44.6 foreign private assets 706.2 All changes, net 750.8 Allocation of SDRs 0 Statistical discrepancy -39.2 Balance on capital account $338.9 Carbaugh, Chap. 11
Balance of Payments US Balance of Payments 1970-99 ($ bill.) Carbaugh, Chap. 11
Balance of Payments Is a current account deficit a problem? • Current account deficit has little to do with foreign trade practices or competitiveness • Current account deficit is determined mostly by domestic macro-economic conditions: domestic demand exceeds supply and increases imports • Paid for by borrowing • A prosperous America goes shopping on credit Carbaugh, Chap. 11
