Chapter 1
Payments among
Nations
Balance of Payment
Learning Objectives
• Explain what is meant by a country’s “balance-of-payments” statement
and how it is constructed.
• Analyze the difference between alternative accounting balances within the
balance of payments.
• Describe the recent balance-of-payments experience of some countries.
• Define the international investment position of a country.
Key words
The balance of payments
The financial assets
Double-entry bookkeeping
Current account balance
Capital account balance
Trade deficit
Official international reserve assets
Statistical discrepancy
international investment position
Understanding
➢ Trade deficits harmful or may not??
➢ What Does a Current Account Deficit (Surplus) Mean?
➢ Understanding Capital and Financial Accounts in the Balance of
Payments
➢ In May 2021, The United States was the world's biggest debtor nation,
posting a trade deficit of more than $71.2 billion
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4
1-1 The balance of payments
国际收支及国际收支平衡表
1-1 The balance of payments ---
Definition
The balance of payments(BOP) is the set of accounts recording all
flows of value between a nation’s residents and the residents of the rest
of the world during a period of time.
The balance of payments is a statistical statement that systematically
summarizes, for a specific time period, the economic transactions of an economy
with the rest of the world.
• IMF 1993 edition of the Balance of Payments Manual(the Manual5, BP5)
• The balance of payments and international investment position manual (the Manual6,BPM6)
（2010-3）
The Balance of Payments
The Balance of Payments is a record of the economic transactions
between the residents of one country and the rest of the world during
a period of time
• flow of value, during a period of time ,not stock of value，not at one
point of time. Records are kept annually and quarterly.
• An international transaction is an exchange of goods, services, or
assets between residents of one country and those of another
• between resident and non-residents .Residents include businesses,
individuals, and government agencies that make the country their legal domicile
Accounting principles
Double-entry bookkeeping/accounting
• An international transaction involves two parties, and each transaction
enters the accounts twice: once as a credit (+) and once as a debit (-).
• A credit (+) is a flow for which the country is paid;
• A debit (--) is a flow for which the country must pay.
Credit transaction (+)
Receipt of a payment from foreigners
Debit transaction (-)
Payment to foreigners
Double-entry bookkeeping
Credit transaction (+)
Debit transaction (-)
Receipt of a payment from foreigners
Payment to foreigners
• 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
• Increase in short-term private assets
abroad
• Investments in the United States by
overseas residents
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
•Decrease in short-term private
assets in the U.S.
• 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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Balance-of-Payments Structure
• A. Current Account
1． Goods
2． Service
3． Income
4．Current Transfers
• B. Capital and Financial Account
1. Capital Account
2. Financial Account
Direct Investment
Portfolio Investment
Other Investment
• Reserve Assets
• . C. Errors and Omissions Account
Balance-of-Payments Structure
• Current account of the balance of payments (CA)
• Monetary value of international flows:，transactions in
• goods, import& export,---Merchandise trade
• services, invisible trade
• income flows,
Agricultural products,
machinery, autos,
petroleum,
electronics, textiles
• unilateral transfers
transportation travel or tourism services,
insurance, education,
telecommunications ,financial, technical
and other business and professional
services, trade mark, royalties ,
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Balance-of-Payments Structure
• Current account of the balance of payments (CA)
--Monetary value of international flows:，transactions in
• goods, import& export,---Merchandise trade
• services, invisible trade
• income flows(BP5)（Primary Income ,BP6)
Employee Compensation:
Investment Income:
• unilateral transfers/Current Transfer(BP5)
-- (Secondary Income, BP6)
government foreign aid,
individual, non-government:
international migrants’
remittance
Secondary Income The secondary income account
reports current transfers between residents and
nonresidents. Various types of current transfers are
recorded in this account to show their role in the
process of income distribution between the
economies.
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unilateral transfers—US example
• Transfers under US military grant programs
• US Government grants, excluding military grants of goods and services
• US Government pensions and other transfers: (1) payments of social security,
railroad retirement, and other social insurance benefits to eligible persons residing
abroad, (2) payments under retirement and compensation programs for former US
Government civilian employees, military personnel, and veterans residing abroad,
(3) payments under US educational, cultural exchange, and research programs, (4)
membership contributions to international nonfinancial organizations, (5) damage
claims paid by the US armed services in countries where they have installations,
and (6) other transfers.
• Private remittances and other transfers: This account measures net private
unilateral transfers of goods, services, and cash and other financial assets
between US private residents and foreign residents.
Balance-of-Payments Structure
• Current account of the balance of payments (CA)
• Monetary value of international flows:，transactions in
• goods, import& export,---Merchandise trade
• services, invisible trade
• income flows,
• unilateral transfers
Merchandise trade
balance:
trade deficit/ surplus
To calculate a goods-and-services
balance, add services to the merchandise
trade account
When balance +, surplus of goods-and-services
transactions
When balance −, deficit of goods-and-services
transactions
Goods-and-services balance is part of a nation’s
gross domestic product (GDP)
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Balance-of-Payments Structure
• Merchandise/ trade balance (1)
• Credit (+): If positive: trade surplus, the dollar value of merchandise exports
• Debit (-): If negative: trade deficit—the dollar value of merchandise imports
• Goods and services balance---Net export of goods and services (2)
• Services and merchandise trade account
• If positive: Surplus of goods and services transactions
• Excess exports over imports, Add to GDP
• If negative: Deficit of goods and services transactions
• Current account balance (surplus, deficit)
(2)+ net Income receipts and payments +unilateral transfer
• Balance on goods and services
• Investment income
Net earnings= Earnings on U.S. investments
• Unilateral transfers
abroad - payments on foreign assets in the U.S.
Compensation to employees
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U.S. balance of payments, 1980–2008 (billions of dollars)
(1)
(2)
(3)=(1)+(2)
(4)
(5)
(6)=(3)+(4)+(5)
The formula for the current account balance is:
CAB = (X − M) + (N Y + NCT )
where
X Exports of goods and services M Impots of goods and services NY Net income abroad
NCT Net current transfers
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classroom use
Balance-of-Payments Structure
• Capital and Financial Account (cont’d)
• Capital account
Financial account
• Major types of capital transfers are debt forgiveness
and migrants’ goods and financial assets
accompanying them as they leave or enter country
• Acquisition and disposal of nonfinancial assets include
sale and purchase of rights to natural resources,
patents, copyrights, and trademarks
Balance-of-Payments Structure
➢Capital account
capital transfers ：capital transfer related
to the purchase and sale of fixed assets
such as real estate.
flows of special categories of assets
(capital):
typically non-market, non-produced, or
intangible assets like debt forgiveness,
copyrights and trademarks
Major types of capital transfers are
debt forgiveness and migrants’ goods
and financial assets accompanying
them as they leave or enter country
Acquisition and disposal of
nonfinancial assets include sale and
purchase of rights to natural
resources, patents, copyrights, and
trademarks
Deference between FDI and
indirect investment
• Foreign direct investment (FDI)
• Investments that a non-resident entity
realizes with the aim of acquiring a
durable interest in a resident enterprise
(long-term relationship and influence on
the enterprise’s management)
• The investor holds at least 10% of the
shares or the voting rights in the
enterprise(IMF,10%, China,25%)
Portfolio investment
---indirect investment
Does not involve
influence of foreign owners
interest income,
dividend?—current
account
Balance-of-Payments Structure
• Private Sector Financial Transactions
• Capital and financial transactions recorded in balance-of-payments
statement by applying + (credit) to capital and financial inflows and
− sign (debit) to capital and financial outflows
• Financial inflow (credit entry +) might occur when
• (1) U.S. liabilities to foreigners rise (French resident purchases securities of IBM);
• (2) U.S. claims on foreigners decrease (Citibank receives repayment of loan to
Mexican firm);
• (3) foreign-held assets in U.S. rise (Toyota builds plant in U.S.);
• or (4) U.S. assets overseas decrease (Coca-Cola sells Japanese bottling plant to
Japanese buyer).
• Financial outflows imply opposite movements
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21
Balance-of-Payments Structure
• Private Sector Financial Transactions
• Vast majority of transactions in capital and financial account come
from private financial transactions; include
• Direct investment: residents of one country acquire controlling interest
(stock ownership of 10 percent or more) in business of another country
• Securities: private-sector purchases of debt issued by governments and
private companies
• Bank claims and liabilities: loans, overseas deposits, acceptances, foreign
commercial paper, and foreign government obligations
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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
• Reserve assets
• Official reserve assets are
assets that are held by
governments and that are
recognized by governments
as fully acceptable for
payments between them.
• Transactions involving the
assets of which monetary
authorities consider that they
dispose in order to finance the
balance of payments,
including IMF loans
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Balance-of-Payments Structure (10 of 13)
Official reserve assets
• Stock of gold reserves held by U.S. government
• Convertible currencies such as Japanese yen, readily acceptable as
payment in international transactions
• Reserve position of U.S. in International Monetary Fund (IMF)
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Balance-of-Payments Structure (12 of 13)
Special drawing rights, new reserve asset created by the IMF as a
supplement to the existing reserves of member countries.
• can be transferred among nations in settlement of balance-ofpayments deficits or stabilization of exchange rates
• Is basket of currencies that includes U.S. dollar, Japanese yen,
UK pound, Chinese yuan and euro
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25
Balance-of-Payments Structure
• Official Settlements Transactions
(cont’d)
Purposes:
international liquidity to finance short run trade deficits and weather periodic currency
crises
provide ability to buy or sell reserve assets in private markets in order to stabilize exchange
rates
• Official holdings of reserves used for two purposes
• Provide a country sufficient international liquidity to finance short-run trade deficits, currency
crises, etc.
• Central banks sometimes buy or sell official reserve assets in the private sector to stabilize their
currencies’ exchange rates
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26
Balance-of-Payments Structure
• Statistical Discrepancy: Errors & Omissions
• The current account balance may not exactly equal the financial account
balance due to incomplete or imperfect data, illegal activities, and
mismatches on the timing of data collection.
• Data collection process for balance-of-payments figures imperfect
• Government statisticians base figures partly on information collected &
partly on estimates
• When statisticians sum credits & debits, rarely match
• Since debits must equal credits, residual is inserted to make them equal
• This correcting entry is statistical discrepancy, or errors and omissions
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Balance of payments account
(Double-Entry Accounting)
Credits (+)
(leading to the receipt of payments from
foreigners)
⚫ Merchandise exports
⚫ Service exports
⚫ Income received from investments
abroad
⚫ Gifts received from foreign residents
⚫ Aid received from foreign governments
⚫ Investments in the home country by
overseas residents
⚫ Official reserve asset reduced
Debits (-)
(Leading to payments to foreigners)
⚫ Merchandise imports
⚫ Service imports
⚫ Income paid on investments of
foreigners
⚫ Gifts to foreign residents
⚫ Aid given by the home country’s
government
⚫ Overseas investment by home country’s
residents
⚫ Official reserve asset added
Balance of payments of Europa
(C= millions)
HOME WORK 1-1
• Use the information in the following table on Mexico’s 1996
international transactions to answer the questions ( US $ in millions)
• Merchandise imports
$ 89,469 - 89469
6531
• Merchandise exports
$96,000
• Services exports
$10,901
• Services imports
$10,819 -10819
• Investment income receipts $4,032
• Investment income payments $17,099
• Unilateral transfer
$4,531
• A. what is the balance of trade?
• （trade balance6531, trade and service balance 6613)
• B. What is the current account balance?
IMF balance of payments summary: the United States, Japan, Germany, France,
Italy, Canada and the United Kingdom, 2002 (US$ billions)
U.S. Balance of Payments
(1 of 3)
Merchandise trade balance commonly referred to as trade
balance
In 2016, U.S. had merchandise trade deficit of -$749.9 billion
— difference between U.S. merchandise exports and imports
Trade deficits not popular with U.S. residents & policymakers
• Negatively affect terms of trade, employment levels, stability of
international money markets
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33
Taken as a whole, U.S. international transactions always balance
Any force leading to an increase or decrease in one balance-of-payments account leads
to exactly offsetting changes in balances of other accounts
In Table 10.3, U.S. had deficit of -$465.9 billion ,Offsetting this deficit was a combined
surplus of $465.9 billion in remaining capital & financial accounts
Merchandise trade balance commonly referred to as trade balance
In 2016, U.S. had merchandise trade deficit of -$749.9 billion
— difference between U.S. merchandise exports and imports
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35
U.S. Balance of Payments
(2 of 3) Table 10.3
U.S. Balance of Payments, 1980–2016 (Billions of Dollars)
Year
Merchandise
Trade-Balance
Services
Balance
Goods and
Services-Balance
Income Receipts and
Payments-Balance
Unilateral
Transfers-Balance
Current
Account-Balance
1980
−25.5
6.1
−19.4
30.1
−8.3
2.4
1984
−112.5
3.3
−109.2
30.0
−20.6
−99.8
1988
−127.0
12.2
−114.8
11.6
−25.0
−128.2
1992
−96.1
55.7
−40.4
4.5
−32.0
−67.9
1996
−191.3
87.0
−104.3
17.2
−42.1
−129.2
2000
−452.2
76.5
−375.7
−14.9
−54.1
−444.7
2004
−665.4
47.8
−617.6
30.4
−80.9
−668.1
2008
−820.8
139.7
−681.1
127.6
−119.7
−673.2
2012
−735.3
195.8
−539.5
198.6
−134.1
−475.0
2016
−749.9
249.3
−500.6
180.6
−161.2
−481.2
Source: From U.S. Department of Commerce, Survey of Current Business, various issues.
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