International Economics
By Robert J. Carbaugh
9th Edition
Chapter 10:
The Balance of Payments
Copyright ©2004, South-Western College Publishing
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 or assets
 “Residents” means businesses, individuals
and government agencies, including citizens
temporarily living abroad but excluding local
subsidiaries of foreign corporations
Carbaugh, Chap. 11
2
The Balance of Payments
Double-entry accounting in the BOP
 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
3
The Balance of Payments
Double-entry accounting (cont’d)
 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
 Each credit transaction has a balancing debit
transaction, and vice versa, so the overall
balance of payments is always in balance
Carbaugh, Chap. 11
4
Structure of the Balance of Payments
Current account
 Goods and services balance
 Merchandise trade balance
 Services balance
 Investment income (net)
 Unilateral transfers
 Private transfer payments
 Governmental transfers
Carbaugh, Chap. 11
5
Structure of the Balance of Payments
Capital and financial account
 All purchases or sales of assets, including:




Direct investment
Securities (debt)
Bank claims and liabilities
Official settlements transactions
Carbaugh, Chap. 11
6
Current account
Current account surplus and deficit
 Current account and capital & financial account
balance each other; when one is in surplus the
other must be in deficit
 Current account surplus means exports of
goods and services, investment income and
transfers exceed imports and outflows
 Current account deficit means imports of goods
and services, and outflows are greater than
exports and inflows; must be financed by
borrowing (capital account inflows)
Carbaugh, Chap. 11
7
Balance of Payments
US Balance of Payments, 2001 ($ bill.)
Current account
Merchandise trade
exports
$720.8
imports
-1,147.4
Net
Services
Travel & transport recpts. 13.4
other services, net
65.4
All services, net
Balance on goods & services
Carbaugh, Chap. 11
-426.6
78.8
-347.8
Cont’d.
8
Balance of Payments
US Balance of Payments, 2001 ($ bill.)
Current account (cont’d)
Income receipts & payments
investment income, net
-13.7
employee compensation
-5.4
All income, net
-19.1
Unilateral transfers, net
-50.5
Balance on current account
Carbaugh, Chap. 11
$-417.4
9
Balance of Payments
US Balance of Payments, 2001 ($ bill.)
Capital & financial account
Capital account transactions, net
0.7
Financial account transactions, net 455.8
Statistical discrepancy
-39.1
Balance on capital &
financial account
$417.4
Carbaugh, Chap. 11
10
Balance of Payments
US Balance of Payments 1970-2001
Carbaugh, Chap. 11
11
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)
 Whether a current account deficit is good or
bad depends on whether the borrowed funds
are used to pay for consumption or investment
Carbaugh, Chap. 11
12
Balance of Payments
Balance of international indebtedness
 Summarizes one nation’s overall quantity of
assets and liabilities against the rest of the
world
 Shows whether the nation is a net debtor or
a net creditor
 Indicates sensitive items, such as short
term debt held by foreigners which could be
liquidated quickly, straining finances
Carbaugh, Chap. 11
13