The Balance of Payments
Balance of Payments
 A record of international transactions between
residents of one country and the rest of the
world
 International transactions include exchanges
of goods, services and assets (bank deposits,
stocks, bonds, real estate, factories)
 “Residents” includes citizens temporarily living
abroad but excludes local subsidiaries of
foreign corporations
Carbaugh, Chap. 11
1
The Balance of Payments
 All transactions are either debit or credit
transactions
 Credit transactions result in receipt of
payment from abroad






Merchandise exports
Transportation and travel receipts
Income received from investments abroad
Gifts received from foreign residents
Aid received from foreign governments
Local investments by overseas residents
Carbaugh, Chap. 11
2
The Balance of Payments
 Debit transactions lead to payments to
foreigners
 Merchandise imports
 Transportation and travel expenditures
 Income paid on investments of foreigners
 Gifts to foreign residents
 Aid given by home government
 Overseas investments by home country
residents
Carbaugh, Chap. 11
3
Structure of the Balance of Payments
Current account: payment for currently
produced goods and services
 Goods and services balance
 Merchandise trade balance
 Services balance
 Investment income (net)
 Unilateral transfers
 Private transfer payments
 Governmental transfers
Carbaugh, Chap. 11
4
Structure of the Balance of Payments
Capital account
 All purchases or sales of assets, including:




Direct investment
Securities (debt)
Bank claims and liabilities
Official settlements transactions
Carbaugh, Chap. 11
5
Current account
Current account surplus and deficit
Current account and capital account
balance each other.
C + I + G + (X – Im) = Y = T + S + C
Trade deficit:
 (Im – X) = (I – S) + (G – T)
Capital In = National Borrowing
Carbaugh, Chap. 11
6
Balance of Payments
US Balance of Payments, 1999 ($ bill.)
Current account
Merchandise trade
exports
$683.0
imports
-1,030.1
Net
Services
Travel & transport recpts.
5.3
other services, net
74.3
All services, net
Balance on goods & services
Carbaugh, Chap. 11
-347.1
79.6
-267.5
Cont’d.
7
Balance of Payments
US Balance of Payments, 1999 ($ bill.)
Current account (cont’d)
Income receipts & payments
investment income, net
-19.1
employee compensation
-5.7
All income, net
-24.8
Unilateral transfers, net
-46.6
Balance on current account
Carbaugh, Chap. 11
$-338.9
8
Balance of Payments
US Balance of Payments, 1999 ($ bill.)
Capital account
Changes in US assets abroad, net
US official reserve assets $8.7
other US govt assets
-0.4
US private assets
-381.0
All changes, net
-327.7
Changes in foreign assets in the US, net
foreign official assets
44.6
foreign private assets
706.2
All changes, net
750.8
Allocation of SDRs
0
Statistical discrepancy
-39.2
Balance on capital account
$338.9
Carbaugh, Chap. 11
9
Balance of Payments
($ bill.)
US Balance of Payments 1970-99
100
50
0
-50
Merchandise
trade balance
-100
-150
Services
balance
-200
Current
account
balance
-250
-300
-350
70 72 74 76 78 80 82 84 86 88 90 92 94 95 96 97 98 99
Carbaugh, Chap. 11
10
Balance of Payments
Current account deficit a problem?
 Current account deficit has little to do
with foreign trade practices or
competitiveness
 Determined mostly by domestic macroeconomic conditions that cause demand
to exceed supply and increase imports
(paid for with borrowing)
Carbaugh, Chap. 11
11