Ch 11 Balance of Payments

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Ch 11 Balance of Payments

• "I am not worried about the deficit.
• It is big enough to take care of
  itself." Ronald Reagan

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Ch 11 Balance of Payments

• Balance of Payments
• Record of all economic transactions between one
  country and the rest of the world.
• Uses double-entry accounting, where each
  transaction has a debit and a credit.
• Credit transactions () receipts from
  foreigners (foreigners buy something from us).
• Debit transactions (-) payments to foreigners
  (we buy something from foreigners)
• Credits gt debits surplus
• Debits gt credits deficit

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Ch 11 Balance of Payments

• Sub Accounts
• Current Account
• Goods and services
• Merchandise trade balance
• exports and imports
• Services
• Restaurants, hotels, shipping, banking
• If Goods and Services balance is positive, there
  is a surplus (added to GDP), meaning US has
  transferred more resources to foreigners than
  from foreigners over a given time period.
• If Goods and Services is negative, there is a
  deficit (subtracted from GDP), meaning US has
  transferred more resources from foreigners than
  to foreigners over a given time period.
• Essentially, same as net exports (X) component of
  GDP (Xexports imports)

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Ch 11 Balance of Payments

• Sub Accounts
• Current Account (cont.)
• Investment income
• Earnings on US investments abroad minus payments
  on foreign assets in US.
• Not K movement, just return on K.

• Unilateral transfers
• Transfers of goods and services (gifts in kind,
  not trade) or financial assets (money gifts)
  between US and world.
• Private transfer payments (movement between
  individuals)
• Government transfer payments (Made by government,
  aid)

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Ch 11 Balance of Payments
Current Account Balance, 2000 (millions of )
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Ch 11 Balance of Payments
Current Account Balance, 2000 (millions of )
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Ch 11 Balance of Payments

• Sub Accounts
• Capital Account
• Transfers of specific types of K, such as debt
  forgiveness, transfers of real estate, such as
  transfer of ownership of embassy or military
  base.
• Usually a very small, less important portion of
  balance of payments.

• Financial Account
• Net changes in US owned assets abroad.
• Net changes in foreign owned assets in the US.
• Assets can include stocks, bonds, factories,
  businesses, government reserves (foreign direct
  investment and portfolio investment).
• Flow changes (not stock) . . .Net changes (not
  gross).

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Ch 11 Balance of Payments
US Balance of Payments, 2000 (millions of )
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Ch 11 Balance of Payments

• The current account and Capital account are
  reflections of each other equal in absolute
  value, one deficit, one surplus.
• Statistical discrepancy (in 2000 35 billion)
  used when they are NOT equal most errors in
  reporting occur in financial account (more
  difficult to track, only done quarterly). Dont
  try this on your accounting test.
• Current account deficit causes concerns
• Pushes down value of dollar, making imports more
  expensive for domestic consumers.
• Adversely impacts employment levels in certain
  domestic industries, resulting from deteriorating
  export levels (could be offset by job gains
  resulting from counterbalanced financial
  inflows).
• Shouldnt ignore surpluses in services and
  financial accounts when considering balance of
  payments.

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Ch 11 Balance of Payments

• Current Account Surplus
• Exports are greater than imports of goods,
  services, etc.
• Represents net receipt of financial claims on
  other nations by the home nation.
• These excess funds can be used to either build up
  financial assets or reduce liabilities to rest of
  world.
• Home nation will become a supplier (lender) of
  funds to the world.

• Current Account Deficit
• Imports are greater than exports of goods,
  services, etc.
• Represents net receipt of financial claims on
  home nation by the rest of the world.
• Home nation will borrow from other nations to pay
  for imports, or will liquidate foreign assets.
• Home nation will become a demander (borrower) of
  funds from the world.