Balance of Payments
• The sum of all transactions that take place
between a nation’s residents and the residents of
all foreign nations.
– The statement shows all the payments a nation
receives from foreign countries and all the payments it
makes to them.
• These transactions include:
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Exports and imports of goods
Exports and imports of services
Tourist expenditures
Interest and dividends received or paid abroad
Purchases and sales of financial or real assets abroad
The Balance of Payments
• The balance of payments is divided into three
components:
– The current account
– The capital account
– The official reserves account
Balance of Payments
Current Account
• The current account summarizes U.S. trade in
currently produced goods and services.
– Balance of Goods – imports and exports
– Balance of Services – Exports and imports of
services such as insurance, consulting, travel,
brokerage services, etc.
Balance of Payments
Capital Account
• The capital account summarizes the purchase
or sale of real or financial assets and the
corresponding flows of monetary payments
that accompany them
– Example: A foreign firm may buy an office
building (real asset) or a government security
(bond).
– A U.S. firm may buy a hotel chain (real asset) or
some of the common stock (financial asset) of a
foreign firm
Balance of Payments
Official Reserves
• The central banks of nations hold quantities of foreign
currencies called official reserves
• These reserves can be drawn on to make up nay net
deficit in the combined current and capital accounts
(much as you would draw on your savings to pay for a
special purchase)
• If the balance of payments is a positive number, the
balance in the U.S. international payments require that
the U.S. government deplete its official reserves
• A positive number indicates that this drawing down
and exporting of reserves is a credit – an in payment
from official reserves that was needed to balance the
over all balance of payments account.
The three accounts of the
Balance of Payments
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The current account
The capital account
and the official reserves account
MUST together equal zero.
Every unit of foreign exchange used (as
reflected in a minus outpayment or debit
transaction) must have a source (a plus
inpayment or credit transaction).
Balance of Payments
Deficits and Surpluses
• Although the balance of payments must always
sum to zero, economist and political officials speak
of balance of payments deficits and surpluses
• They are referring to imbalances between the
current and capital account that cause a drawing
down or a building up of foreign currencies
• A drawing down of official reserves (to create a
positive official reserves entry) measures a nation’s
balance of payments deficit
Balance of Payments
Deficits and Surpluses
• A balance of payments deficit is not necessarily bad nor
is a balance of payments surplus necessarily good.
• However, any nation’s official reserves are limited.
• Persistent payments deficits, which must be financed by
drawing down those reserves, would ultimately deplete
the reserves.
• That nation would have to adopt policies to correct its
balance of payments.
• Such policies might require painful macroeconomic
adjustments, trade barriers and similar restrictions, or a
major depreciation of its currency.
• For this reason, nations seek to achieve payments
balance, at least over several-year periods.