U.S. International Transactions
Balance of Payments
(Comprehensive Measure of U.S.’s Trade and Investment with the Rest of the World)
Web: http://www.bea.gov/international/index.htm#bop
Moderate quarterly revisions. Annual benchmark changes make in June.
International commerce now makes up more than a quarter of all U.S. business activity. The International Transactions Report tracks cross-border movements in trade in goods and services, imports and exports
of investment capital (stocks, bonds, physical assets) and investment income (interest/dividends). Data is seasonally adjusted but not annualized or adjusted for inflation. Data measures quarterly changed in
trade and investment flows.
The International Transaction Release contains 3 sections.
1. Current Account:
Merchandise Trade Account – goods or visible trade. Trade balance = $X -$M
Service Trade Account – Invisible trade (investment banking, insurance, engineering, public relations, accounting, advertising, patent/copyright/movie fees).
Investment Income Account – interest and dividends. Subcategory of service account. Income receipts are classified as export income because earnings are from overseas investments.
Income payments to foreignors are classified as import payments because they are based on capital shipped to the U.S.
Unilateral Transfers – One way transfers (foreign aid, government grants, pension payments, worker remittances)
2. Financial Account:
Movement of investment capital and loans into and out of U.S.
Measures changes in U.S. ownership of foreign stocks, bonds and other assets.
Measures changes in foreign ownership of U.S. securities and private assets.
Measures changes in central bank’s holdings of foreign currencies and securities.
3. Capital Account: uncommon flows of money. Example includes U.S. residents who emigrate and take assets with them.
Balance of Payments = Current account + Financial Account + Capital Account = 0
- represents all economic transactions between U.S. and R.O.W.
Since the 1980s, the U.S. current account balance has been negative, indicating Americans have consumed more than they produced (lived beyond their means) They accomplished this feat by borrowing money
from the rest of the world (ROW) to finance their spending. Americans borrow $2 billion per day to finance their spending. The U.S. in now the largest debtor nation. The debt buildup cannot go on forever and
could destabilize the U.S. and global economy.
Current account data is found on lines 71-76 of the report. A negative figure reflects how much the U.S. has to borrow from the ROW to finance spending by American consumers, businesses and government.
What is the possibility of a reversal of foreign investor sentiment against the dollar? An  in external debt =>  concentration risk of U.S. assets on foreign balance sheets =>  foreign investor’s appetite for U.S.
stock and bonds =>  dollar exchange rate =>  import prices => domestic prices =>  inflation =>  interest rates. To compensate for the concentration risk, foreign investors will have to be compensated with
higher interest rates.
Does the trade deficits and capital surplus reflect the strength of the U.S. economy? The U.S. has a stable and attractive investment environment (liquid markets, creditworthy borrowers, strong productivity
growth)
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Market Analysis:
Bonds:  current account deficit => appreciating dollar =>  (DP/P)ET+1 =>  DBonds =>  iBonds
Stocks:  exports =>  net exports =>  domestic manufacturing =>  future profits =>  PStocks
Dollar:  current account deficit =>  Demand for dollars &  Supply of dollars => appreciating dollar
$ Billion
Current Account Balance
Percent
$25
1%
$0
0%
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
-$25
-1%
-$50
-2%
-$75
-3%
-$100
-4%
-$125
-5%
-$150
-6%
-$175
-7%
-$200
-$225
Quarterly Balance (LHS)
% of GDP (RHS)
-8%
-9%