The Balance of Payments
Objective:
Explain and interpret the various accounts in the balance of payments.
The U.S. Balance of Payments, 1996 (in billions)
Current Account
1
U.S. goods exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2
U.S. goods imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
Balance of Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
U.S. exports of services . . . . . . . . . . . . . . . . . . . . . . . . . .
5
U.S. imports of services . . . . . . . . . . . . . . . . . . . . . . . . . .
6
Balance on goods and services . . . . . . . . . . . . . . . . . . . . . .
7
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . .
8
Net transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9
Balance on current account
Capital Account
10
Foreign purchases of assets in the United States . . . . . . . . .. .
$
11
U.S. purchases of assets abroad . . . . . . . . . . . . . . . . . . . . .
12
Balance on capital account
Official Reserves Account
13
Official Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
+612
-803
-191
+237
-157
-111
+3
-40
-148
+517
- 376
+141
+7
$ 0
Explanation: A nation’s balance of payments is the sum of all transactions which take place between its residents and the residents of
all foreign nations. These transactions include exports and imports of goods and services, tourist expenditures, interest and dividends
received or paid abroad, net transfer payments, and purchases and sales of financial (stocks and bonds) and real (office buildings, hotel
chains, etc.) assets abroad. The balance of payments statement shows all the payments a nation receives from foreign countries and all
the payments it makes to them. The three components of the balance of payments are: the current account, the capital account and the
official reserves account. A plus (+) sign in the balance of payments indicates an inpayment (inflow) or credit. These credits earn and
generate supplies of foreign currencies in the U.S. A minus (-) sign represents an outpayment outflow) to the rest of the world. These
debits reduce the stock of foreign currencies in the U.S.
Current Account:
A country’s balance of trade is the difference between its exports and imports. It can be favorable or unfavorable. In 1996, did
the U.S. have a balance of trade deficit or surplus?
A country’s balance on goods and services adds exports and imports of services to the balance of trade. In 1996, which was
greater, exports or imports of services?
Net investment income represents the difference between the interest and dividend payments to the U.S. from foreign countries
and the interest and dividend payments of the U.S. to foreign countries.
Net transfers, both public and private, indicate payments such as foreign aid, pensions paid to citizens abroad, remittances by
immigrants to relatives abroad, etc., that are in excess of payments received by Americans. The $40 billion in outpayments or
debits in 1996 represent a decrease or increase in the available supplies of foreign currencies in the U.S.?
The balance on current account is the sum of all the transactions in the current account. In 1996, the balance on the current
account was a deficit or surplus of $148?
Capital Account:
The capital account summarizes the flows of payments (money “capital) from the purchase or sale of real or financial assets.
Foreign purchases of real or financial assets in the U.S. represent the “export” of U.S. assets in return for capital ($) inflows or
increases in the supply of foreign currencies.
U.S. purchases of assets abroad represent the outflow of money capital for the purchase of foreign assets. It represents a
reduction in our supply of foreign currencies.
The balance on capital account represents the sum of the sale of our assets and the purchase of foreign assets. In 1996, the
balance on capital account indicates that foreigners bought more or less of American assets than Americans bought of foreign
assets?
Official Reserves Account:
Official reserves are the supplies of foreign currencies held by the central banks (U.S. federal reserve banks) of nations.
If the sum of the current and capital accounts yields a deficit (we paid out more in foreign currencies than we took in), the official
reserves of the nation are reduced to cover the deficit. This drawing down of foreign currency reserves is indicated as a credit or
inflow in the balance of payments. It is as if the central bank is “paying in” the difference or shortfall in foreign currency.
If the sum of the current and capital accounts yields a surplus, the official reserves of a nation are increased. This increase is
indicated as a debit in the balance of payments. It is as if the money is being paid “out” to the central bank.
The sum of the current, capital, and official reserves accounts must always sum to zero.
In 1996, the United States was a net debtor or creditor nation? Did we end up buying more from foreign nations than they bought
from us or vice versa? A deficit in the balance of payments is not necessarily a bad thing; however, continuous large deficits can lead
to a depletion of foreign reserves that may require painful macroeconomic adjustments to overcome.