BA 187: INTERNATIONAL TRADE
WEEK 1
9.1 MEASURING INTERNATIONAL TRANSACTIONS
- BALANCE OF PAYMENTS records all economic transactions that have taken place in a given
period between a country’s residents and the rest of the world
- note this is a flow concept, involves amount over a period of time
- accounting framework
- receipt from the rest of the world is treated as a credit (+ve)
- payment to the rest of the world is treated as a debit (-ve)
- possesses property of double entry bookkeeping
- i.e. any transaction gives rise to a credit and debit of equal value
CURRENT ACCOUNT (TRADE FLOWS)
1. EXPORTS OF GOODS, SERVICES, AND INVESTMENT INCOME
- exports represent a credit to the balance of payments.
2. IMPORTS OF GOODS, SERVICES, AND INVESTMENT INCOME
- imports represent a debit to the balance of payments.
3. UNILATERAL TRANSFERS
- international transactions not involving explicit
CAPITAL ACCOUNT (CAPITAL FLOWS)
4. U.S. ASSETS ABROAD
- net purchases of foreign assets by U.S. residents i.e. capital outflows
- debits because they result in payments to the rest of the world
- increases in U.S. official reserve assets
- increases in U.S. gov’t assets
- increases in U.S. private assets
5. FOREIGN ASSETS IN THE U.S.
- net sales of U.S. assets by foreigners i.e. capital inflows
- credits because they result in receipts from the rest of the world
- increases in foreign official assets
- increases in foreign private assets
6. ALLOCATION OF SDR’S
- SDR’s (Special Drawing Rights) are type of int’l reserve asset created
and distributed to countries by IMF (Int’l Monetary Fund).
- payments of SDR’s are receipts for U.S. so appear as credit & vice versa.
7. STATISTICAL DISCREPANCY
- ensures that items in the balance of payments add to zero.
- for U.S.: unrecorded service flows
- for Mexico: capital flight
BA 187: INTERNATIONAL TRADE
WEEK 1
9.2 BALANCE OF PAYMENTS SUB-TOTALS
9.2.1 THE TRADE BALANCE
- merchandise trade balance
- factors affecting trade balance include
- exchange rates: rise in early 1980’s of U.S. $
- domestic monetary and fiscal policies: recovery since 1991 has worsened
- unexpected supply shocks: oil price shocks 1974, 1979
- economy’s competitiveness vis a vis its trading partners: recent concerns
9.2.2 THE BALANCE ON SERVICES
- net trade in services for U.S.
- probably underestimated due to problems in tracking.
9.2.3 THE BALANCE ON INVESTMENT INCOME
- net of investment income received by U.S. citizens from foreigners
9.2.4 THE BALANCE ON GOODS, SERVICES, AND INVESTMENT INCOME
- this a summary of the sub-balances above.
9.2.5 THE CURRENT ACCOUNT BALANCE (CAB)
- measures the economy’s trade in goods and services with the rest of the world,
taking into account unilateral transfers.
- CAB surplus (deficit) must be offset by a deficit (surplus) in the international
balance on trade in assets (the capital account).
9.2.6 THE CAPITAL ACCOUNT BALANCE
- all international asset transactions except for those made by monetary authorities in
assets that serve as international reserves.
- capital account is strongly influenced by interest rates, exchange rate
expectations, and risk perceptions.
- differentiate between short-term and long-term capital accounts
- difficult to implement, especially if financial markets in country are fairly
liquid.
9.2.7 THE OFFICIAL RESERVES SETTLEMENTS BALANCE (ORS)
- the sum of the current and capital accounts (plus SDR’s).
- is an imperfect measure of the intervention of monetary authorities into the FX
markets.
- under Fixed EXR it is a fairly good indicator of actions.
- under freely Floating EXR not an indicator at all, since central bank is not
intervening.
BA 187: INTERNATIONAL TRADE
WEEK 1
U.S. Balance of Payments Categories
Transaction
Exports of goods, services & invest. income
Merchandise goods, excluding military
Services and military goods
Income receipts on investments
Imports of goods, services & invest. income
Merchandise goods, excluding military
Services and military goods
Income receipts on investments
Unilateral transfers, net
U.S. assets abroad, net [increase/capital outflow (-)]
U.S. official reserve assets, net
U.S. gov’t assets, other than off. res. assets, net
U.S. private assets, net
Foreign assets in U.S., net [increase/capital inflow (+)]
Foreign official assets, net
Other foreign assets, net
Allocation of Special Drawing Rights, (SDR’s)
Statistical discrepancy
All Numbers in millions of U.S. $
U.S. 1991
$ 704,914
415,962
163,637
125,315
-716,624
-489,398
-118,341
-108,886
8,028
-62,220
5,763
3,397
-71,379
66,980
18,407
48,573
0
-1,078
BA 187: INTERNATIONAL TRADE
WEEK 1
9.1 MEASURING INTERNATIONAL TRANSACTIONS
9.1.1 EXPORTS OF GOODS, SERVICES, AND INVESTMENT INCOME
- exports represent a credit to the balance of payments.
- merchandise exports estimated from Customs receipts.
- export of services (invisibles) such as transport services to foreigners,
expenditures of visitors to U.S., royalties, licensing fees, technical services to
foreigners.. Difficult to measure, use questionnaires, etc.
- investment income are receipts of income on U.S. assets abroad, both private
and gov’t.
- includes interest income, dividends, and share of R/E.
- gives rise to receipts from Rest-of-World, hence credit.
9.1.2 IMPORTS OF GOODS, SERVICES, AND INVESTMENT INCOME
- imports represent a debit to the balance of payments.
- merchandise exports estimated from Customs receipts.
- export of services (invisibles) such as expenditures of U.S. tourists in ROW,
royalties, licensing fees paid to foreigners, technical services from foreigners.
- investment income are payments of income on foreign assets within the U.S.,
both private and gov’t.
9.1.3 UNILATERAL TRANSFERS
- refers to international transactions that do not involve the explicit exchange of goods,
services, or assets.
- includes U.S. gov’t grants, i.e. foreign aid, food donations, etc.
- also private transfers such as gifts to foreigners
9.1.4 U.S. ASSETS ABROAD
- net purchases of foreign assets by U.S. residents in a given time period
- appear as debits because they result in payments to the rest of the world
- term these items capital outflows for this reason
- can divide into three sub-categories
- increases in U.S. official reserve assets
- increases in holdings of int’l reserves
- increases in U.S. gov’t assets
- new lending to foreign countries by U.S. gov’t
- increases in U.S. private assets
- net purchases of foreign assets by private sector
- includes direct private investment, portfolio investment private loans to
foreigners
BA 187: INTERNATIONAL TRADE
WEEK 1
9.1 MEASURING INTERNATIONAL TRANSACTIONS
9.1.5 FOREIGN ASSETS IN THE U.S.
- net sales of U.S. assets by foreigners in a given time period
- appear as credits because they result in receipts from the rest of the world
- termed capital inflows as a result
- can divide into two sub-categories
- increases in foreign official assets
-asset sales to foreign central banks; CD’s, T-bills, etc.
- increases in foreign private assets
- net purchases of U.S. assets by private foreign residents
- includes direct private investment, portfolio investment,
private loans to U.S. residents
9.1.6 ALLOCATION OF SDR’S
- SDR’s (Special Drawing Rights) are type of int’l reserve asset created
and distributed to countries by IMF (Int’l Monetary Fund).
- payments of SDR’s are receipts for U.S. so appear as credit & vice versa.
9.1.7 STATISTICAL DISCREPANCY
- ensures that items in the balance of payments add to zero.
- this must be true by the nature of double-entry bookkeeping
- any int’l transaction involves equal credit and debit
- saw this above for the sale of U.S. auto to foreigner
- in practice measurement errors a physical impossibility of measuring all
transactions will give rise to difference between recorded debits and
recorded credits.
- the difference is offset by the statistical discrepancy
- many sources of this
- for U.S.: unrecorded service flows
- for Mexico: capital flight
9.2 BALANCE OF PAYMENTS SUB-TOTALS
- by double-entry bookkeeping, overall balance of payments is by definition zero.
- there are sub-balances, however, that may be non-zero and provide indications for
dynamic properties of subsectors of the economy.
- an sub-balance (or account) is said to be in surplus if credits exceed debits in this area, i.e.
receipts are greater than payments. Similarly the sub-balance has a deficit if debits exceed
credits in the area.
BA 187: INTERNATIONAL TRADE
WEEK 1
9.2 BALANCE OF PAYMENTS SUB-TOTALS
9.2.1 THE TRADE BALANCE
- merchandise trade balance
- U.S. trade surpluses in 1950’s and 1960’s give way to large trade deficits beginning
in the 1970’a and extending through the 1990’s.
- factors affecting trade balance include
- exchange rates: rise in early 1980’s of U.S. $
- domestic monetary and fiscal policies: recovery since 1991 has worsened
- unexpected supply shocks: oil price shocks 1974, 1979
- economy’s competitiveness vis a vis its trading partners: recent concerns
9.2.2 THE BALANCE ON SERVICES
- net trade in services for U.S.
- strong net exporter of services, particularly in recent years due to computers,
financial products, etc.
- probably underestimated due to problems in tracking.
9.2.3 THE BALANCE ON INVESTMENT INCOME
- net of investment income received by U.S. citizens from foreigners
- historically this has been a growing surplus due to increasingly large stock of foreign
assets held by U.S. citizens
- some deterioration in the mid-1980’s due to purchases of U.S. assets
purchased by foreigners growing more quickly than U.S. purchases of
foreign assets.
- this is related to the switch of U.S. from net creditor to net debtor during this
period; a change in a stock quantity (assets) being reflected in a flow quantity
(income).
9.2.4 THE BALANCE ON GOODS, SERVICES, AND INVESTMENT INCOME
- this a summary of the sub-balances above.
- it is a straightforward calculation that may have some interest to someone
9.2.5 THE CURRENT ACCOUNT BALANCE (CAB)
- measures the economy’s trade in goods and services with the rest of the world,
taking into account unilateral transfers.
- it is the most commonly used summary sub-balance as it ignores only the trade in
assets with the rest of the world.
- thus a CAB surplus (deficit) must be offset by a deficit (surplus) in the
international balance on trade in assets (the capital account).
BA 187: INTERNATIONAL TRADE
WEEK 1
9.2 BALANCE OF PAYMENTS SUB-TOTALS
9.2.5 THE CURRENT ACCOUNT BALANCE (CAB)
- really can think about this in terms of a household
- if CAB is in deficit then country is buying more from rest of the world
than it is selling. This shortfall must be made up for by either dissaving
(selling assets) or by borrowing, (borrowing funds from abroad), result is a
surplus on the capital account.
- CAB deficit over time raises the worrying question about accumulating
potentially unmanageable debt burdens in the future
- thus flow results raise the question of stock problems.
- evidence indicates that eliminating trade deficits have, in the past, been done but
only through an economy suffering through major, prolonged recession.
- this would certainly seem to be the case for the U.S. in the recent past.
9.2.6 THE CAPITAL ACCOUNT BALANCE
- all international asset transactions except for those made by monetary authorities in
assets that serve as international reserves.
- includes U.S. residents’ purchases of foreign stocks and bonds, U.S. bank lending
to foreign companies and governments, as well as investment of foreign corporations
in U.S. T-bills and CD’s, except for those purchased by foreign central banks.
- U.S. capital account surpluses and their relation to the U.S. CAB, particularly in the
1980’s.
- capital account is strongly influenced by interest rates, exchange rate
expectations, and risk perceptions.
- differentiate between short-term and long-term capital accounts
- difficult to implement, especially if financial markets in country are fairly
liquid. How do we know investor is buying “long-term” assets to hold to
maturity, rather than for some shorter time horizon?
- answer is that we don’t.
9.2.7 THE OFFICIAL RESERVES SETTLEMENTS BALANCE (ORS)
- the sum of the current and capital accounts (plus SDR’s).
- is an imperfect measure of the intervention of monetary authorities into the FX
markets.
- under Fixed EXR it is a fairly good indicator of actions.
- under freely Floating EXR not an indicator at all, since monetary
authorities are not intervening.
- under managed Floating EXR, where monetary authorities
intervene to smooth out EXR fluctuations, then ORS again is of
interest for indicator of actions.