chpt10

chapter_10.pptx

The Balance of Payments

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PowerPoint slides prepared by:

Andreea Chiritescu

Eastern Illinois University

Double-Entry Accounting

Balance of payments

Record of the economic transactions

Between the residents of one country and the rest of the world

Double-entry accounting system

International transaction

Exchange of goods, services, or assets

Between residents of one country and those of another

Double-Entry Accounting

Residents

Businesses, individuals, and government agencies

That make the country in question their legal domicile

Credit transaction (+)

Receipt of a payment from foreigners

Debit transaction (-)

Payment to foreigners

Double-Entry Accounting

U.S. credit transaction (+)

Merchandise exports

Transportation and travel receipts

Income received from investments abroad

Gifts received from foreign residents

Aid received from foreign governments

Investments in the United States by overseas residents

Double-Entry Accounting

U.S. debit transaction (-)

Merchandise imports

Transportation and travel expenditures

Income paid on the investments of foreigners

Gifts to foreign residents

Aid given by the U.S. government

Overseas investment by U.S. residents

Double-Entry Accounting

Total balance-of-payments account

Must always be in balance

Surplus

Balance on a subaccount (subaccounts) is positive

Deficit

Balance on a subaccount (subaccounts) is negative

International payments process

In theory

Importers in a country pay the exporters in that same country in the national currency

In reality

Importers and exporters in a given country do not deal directly with one another

To facilitate payments, banks carry out these transactions

GLOBALIZATION

International payments process

FIGURE 10.1

Balance-of-Payments Structure

Current account of the balance of payments

Monetary value of international flows:

Transactions in goods, services, income flows, and unilateral transfers

Merchandise trade

All of the goods the United States exports or imports

Agricultural products, machinery, autos, petroleum, electronics, textiles

Balance-of-Payments Structure

Merchandise trade balance

Credit (+): the dollar value of merchandise exports

Debit (-): the dollar value of merchandise imports

If negative: merchandise trade deficit

If positive: merchandise trade surplus

Balance-of-Payments Structure

Services

All the services the U.S. exports or imports

Goods and services balance

Services and merchandise trade account

If positive:

Surplus of goods and services transactions

If negative:

Deficit of goods and services transactions

Balance-of-Payments Structure

Goods and services balance

Net export of goods and services

Positive:

Excess exports over imports

Add to GDP

Negative:

Excess imports over exports

Subtracted from GDP

Balance-of-Payments Structure

Income receipts and payments

Net earnings (dividends and interest) on U.S. investments abroad

Earnings on U.S. investments abroad

Minus payments on foreign assets in the U.S.

Compensation to employees

Balance-of-Payments Structure

Unilateral transfers

Transfers of goods and services (gifts in kind) or financial assets (money gifts)

Between the U.S. and the rest of the world

Private transfer payments

Governmental transfers

Current account balance

Balance on goods and services

Investment income

Unilateral transfers

Balance-of-Payments Structure

Capital and financial account

Capital and financial transactions in the balance of payments

All international purchases or sales of assets

Private-sector and official transactions

Private-sector financial transactions

Direct investment

Securities

Bank claims and liabilities

Balance-of-Payments Structure

Balance-of-payments statement

Credit (+): capital and financial inflows

Leads to the home country’s receiving payments from foreigners

Export of goods and services

Debit (-): capital and financial outflows

Leads to foreigners’ receiving payments

Import of goods and services

Balance-of-Payments Structure

Official settlements transactions

Movement of financial assets among official holders

Official reserve assets

Liabilities to foreign official agencies

Statistical discrepancy

Errors and omissions

Information – some is collected, some is estimated

U.S. reserve assets, 2008*

TABLE 10.1

Selected U.S. liabilities to foreign official institutions, 2008*

TABLE 10.2

U.S. Balance of Payments

2008, U.S. - merchandise trade deficit

Exports < Imports

Not popular - adverse consequences on

Terms of trade

Employment levels

Stability of the international money markets

U.S. balance of payments, 2008 (billions of dollars)*

TABLE 10.3

U.S. Balance of Payments

2008, U.S. – goods and services balance

Surplus on service transactions

Merchandise trade deficit

Overall: deficit

2008, U.S. – current account deficit

Excess of imports over exports

Goods, services, income flows, and unilateral transfers

U.S. balance of payments, 1980–2008 (billions of dollars)

TABLE 10.4

The paradox of capital flows from developing to industrial countries

Sources of the net capital flow out of the developing economies

China, Japan, Russia

OPEC

Divergent patterns of growth and investment

Structural differences

Between developing and industrial economies

TRADE CONFLICTS

The paradox of capital flows from developing to industrial countries

Current account deficits in the industrial countries

Increases in both public and private consumption

Declines in national savings rates

TRADE CONFLICTS

What Does a Current Account Deficit (Surplus) Mean?

Balance of payments

Double-entry accounting system

Total debits = Total credits

If the current account registers a deficit

The capital and financial account must register a surplus

If the current account registers a surplus

The capital and financial account must register a deficit

What Does a Current Account Deficit (Surplus) Mean?

Current account balance

Net foreign investment in national income accounting

Current account surplus

Excess of exports over imports

Goods, services, investment income, unilateral transfers

Net receipt of financial claims

Improved net foreign investment position

Capital outflows

Net supplier of funds (lender)

What Does a Current Account Deficit (Surplus) Mean?

Current account deficit

Excess of imports over exports

Goods, services, investment income, unilateral transfers

Increase in net foreign claims upon the home nation

Foreign capital inflows

Net demander of funds from abroad

Worsening of the home nation’s net foreign investment position

What Does a Current Account Deficit (Surplus) Mean?

Net borrowing of an economy

Net borrowing by government

Budget deficit: excess of outlays (G) over taxes (T)

Private-sector net borrowing

Excess of private investment (I) over private saving (S)

What Does a Current Account Deficit (Surplus) Mean?

Capital flows

Are financing the current account deficit

Current account deficit

Driven by capital flows

Capital inflows keep the dollar stronger than it otherwise would be

Boost imports

Suppress exports

What Does a Current Account Deficit (Surplus) Mean?

Current account deficit

Not efficiently reversed by trade policies that attempt to alter the levels of imports or exports

Tariffs

Quotas

Subsidies

What Does a Current Account Deficit (Surplus) Mean?

Business cycle

Rapid growth of production and employment

Associated with large or growing trade and current account deficits

Slow output and employment growth

Associated with large or growing surpluses

Economic downturn of 2007–2009: effect on foreign investment in U.S.

Large capital inflows into the U.S.

Many benefits for Americans

Global economic downturn of 2007–2009

Decrease in the supply of credit that net-saver countries provide to the rest of the world?

Increase of the cost of foreign savings to the United States?

TRADE CONFLICTS

What Does a Current Account Deficit (Surplus) Mean?

U.S. current account deficit

Financed by

Borrowing from foreigners

Selling assets to foreigners

Large net debtor

Paradox in U.S. international transactions

U.S. residents have consistently earned more income from their foreign investments

Than foreigners earn from their larger U.S. investments

What Does a Current Account Deficit (Surplus) Mean?

U.S. current account deficit

Might be less burdensome than often portrayed

Not a threat to total employment for the economy as a whole

Deficit = net inflow of foreign investment

Change the composition of output and employment

What Does a Current Account Deficit (Surplus) Mean?

U.S. current account deficit

Arises mainly because foreigners desire to purchase American assets,

May continue indefinitely

No automatic forces will cause either a current account deficit or a current account surplus

Problem

If foreigners lose confidence in the ability of the U.S. to generate the resources necessary to repay the funds borrowed from abroad

Foreign holders of U.S. securities as of 2007

TABLE 10.5

What Does a Current Account Deficit (Surplus) Mean?

To reduce the deficit

Policies that stimulate foreign growth

Better to reduce the current account deficit through faster growth abroad than through slower growth at home

Better achieved through increased national saving

Than through reduced domestic investment

Balance of International Indebtedness

Balance of international indebtedness

A fixed stock of assets and liabilities against the rest of the world

Record of the international position of the U.S. at a particular time

Accumulated value of U.S.-owned assets abroad

Balance of International Indebtedness

Net creditor to the rest of the world

Accumulated value of U.S.-owned assets abroad

Exceeds the value of foreign-owned assets in the U.S.

Net debtor

Value of foreign-owned assets in the U.S.

Exceeds the accumulated value of U.S.-owned assets abroad

International investment position of the U.S. at year-end (in billions of dollars)

TABLE 10.6

Balance of International Indebtedness

Balance of international indebtedness

Breaks down international investment holdings into several categories

Policy implications can be drawn from each separate category about the liquidity status of the nation

U.S. transition from net creditor to net debtor

Foreign investors placed more funds in the U.S. than U.S. residents invested abroad