An Introduction to International Economics

1. An Introduction to International Economics Chapter 10: Balance of Payments Dominick Salvatore John Wiley & Sons, Inc. Dale R. DeBoer University of Colorado, Colorado Springs

2. Balance of payments • The balance of payments provides a summary statement of international transactions for a nation for a specified period of time. • The balance of payments converts international transactions into dollar terms at the going rate of currency exchange.

3. Key categories • Credit transactions • Transactions that involve receipt of payments from foreign sources. • Major types • Exports of goods and services • Capital inflows • Increases in foreign assets in a nation • Decreases in a nation’s assets abroad

4. Key categories • Credit transactions • Debit transactions • Transactions that involve payment to foreign sources. • Major types • Imports of goods and services • Capital outflows • Increases in a nation’s assets abroad • Decreases in foreign assets in a nation

5. Double entry bookkeeping • In balance of payment accounting, each international transaction is recorded twice – once as a credit, once as a debit. • Examples • $500 in exports to be paid in 3 months time

6. Double entry bookkeeping • Examples • $500 in exports to be paid in 3 months time • $200 spent by a US tourist in London on services

7. Double entry bookkeeping • Examples • $500 in exports to be paid in 3 months time • $200 spent by a US tourist in London on services • $100 in US government foreign aid given to the government of a developing nation

8. Double entry bookkeeping • Examples • $500 in exports to be paid in 3 months time • $200 spent by a US tourist in London on services • $100 in US government foreign aid given to the government of a developing nation • $400 in foreign stocks paid for by increasing foreign bank balances in the U.S.

9. The balance of payments for the U.S. • 2003 data from the Bureau of Economic Analysis in billions of U.S. dollars • WWW link

10. The balance of payments for the U.S. • Service exports • These factors show the source of total service exports. • Income receipts are primarily income earned on past investment activities abroad.

11. The balance of payments for the U.S.

12. Balance of payments for the U.S. • Summary accounts • Merchandise trade balance = - $548 billion • Goods exports – goods imports • Trade balance = - $497 billion • Exports of goods and services – imports of goods and services • Income balance = $33 billion • Current account = -$531 billion • Trade balance + income balance + unilateral transfers

13. The balance of payments for the U.S. • Main portfolio investment items • Direct investment

14. The balance of payments for the U.S. • Main portfolio investment items • Direct investment

15. Balance of payments for the U.S. • Summary accounts • Merchandise trade balance = - $548 billion • Trade balance = - $497 billion • Income balance = $33 billion • Current account = -$531 billion • Financial account balance = $544 billion

16. Balance of payments for the U.S. • Summary accounts • Merchandise trade balance = - $548 billion • Trade balance = - $497 billion • Income balance = $33 billion • Current account = -$531 billion • Financial account balance = $544 billion • The balancing factor: statistical discrepancy • Arises from the mis-recording of items in the balance of payments accounts • Statistical discrepancy = - $12 billion

17. The ORSB • The Official Reserve Settlement Balance (ORSB) measures the change in U.S. official reserve assets and the change in foreign official reserve assets in in the U.S. • The ORSB accommodates for a deficit or surplus in autonomous transactions (transactions that occur for business or profit motives).

18. Historical values Source: Federal Reserve Bank

19. Historical values Source: Federal Reserve Bank

20. Historical values Source: Federal Reserve Bank

21. Historical values Source: Federal Reserve Bank