Balance of Payments

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Balance of Payments

• Phil Bryson
• Global Trade and Finance

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Part IBalance of Payments Accounting
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Balance of Payments Accounting

• Records of transactions among nations have not
  always been kept. Are they very recent?

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Balance of Payments Accounting

• General use of BP accounting is more recent, but
  in 1381 Richard Aylesbury, an Englishman, had not
  only collected such statistics, but was
  developing analysis as to why the accounts
  behaved as the did.

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Balance of Payments Accounting

• It is not clear that they are really necessary!

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Balance of Payments Accounting

• For example, who keeps track of Californias
  balance of payments transactions with other US
  states?

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Balance of Payments Accounting

• What kind of records should be kept?
• What do you want to find out?
• The nature of the record changes by what we are
  trying to find out.

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Balance of Payments Accounting

• What kind of things do governments wish to know?
• What is the international demand for our currency
  doing to its value?
• Do we have enough currency reserves, or capacity
  to pay for our trade?
• Does our trade promote full employment? And so on.

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Balance of Payments Accounting

• What kinds of transactions represent the basic
  focus of balance of payments accounting?
• All transactions between the citizens of a nation
  and those of other nations are recorded in the
  balance of payments for a given period of time.

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Recording International Payments

• How is information recorded in balance of
  payments accounting?
• The basic technique is standard, double-entry
  accounting,
• a flow of funds statement that shows changes in
  assets, liabilities and net worth over time.

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Recording International Payments

• The balance of payments statement is to inform
  government authorities of the international
  position of the country to assist them with
  monetary-fiscal questions as well as trade and
  payments policies.

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Debits, Credits, and International Payments

• What is the meaning of a debit in a balance of
  payments account? What is a credit?
• A debit records a transaction increasing assets
  or reducing liabilities.

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Debits, Credits, and International Payments

• A debit results from some kind of transaction
  requiring an immediate out-payment.
• A debit arises from the purchase of goods,
  claims, or reserve assets and represents an
  inflow of value.

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Debits, Credits, and International Payments

• A credit records a transaction reducing assets or
  increasing liabilities.
• It results from some kind of transaction
  requiring an immediate in-payment.
• A credit arises from the sale of goods, claims,
  or reserve assets and represents an outflow of
  value.

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Sources and Uses of Funds

• How does a country derive foreign currencies it
  needs to conduct its international business?
• The sources of funds, the supply of foreign
  exchange, are
• exports,
• investment income,

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Sources and Uses of Funds

• The sources of funds, the supply of foreign
  exchange, are
• transfer payments received,
• and long-term and short-term borrowing.

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Sources and Uses of Funds

• Credit entries reflect the sources, debit entries
  indicate the uses of foreign exchange.

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Part IIThe Balance of Payments Accounts
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BALANCE OF PAYMENTS ACCOUNTS

• These accounts are to summarize payments a
  country receives from other nations and payments
  it must make to other nations.
• They consist of the following five categories
• 1. MERCHANDISE OR TRADE BALANCE
• (Exports minus imports )

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BALANCE OF PAYMENTS ACCOUNTS

• 2. GOODS AND SERVICES BALANCE
• (Just add services)
• 3. NET UNILATERAL TRANSFERS
• (Gifts)
• U.S. government transfers to foreigners
• (E.g., Foreign aid or wheat from U.S. stockpiles)
• Private remittances of wages earned abroad, and
• Lots of other transfers.

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BALANCE OF PAYMENTS ACCOUNTS

• To here, we are looking at the
• CURRENT ACCOUNT BALANCE
• (Net flows of goods, services and gifts).
• Again
• 1. MERCHANDISE OR TRADE BALANCE
• 2. GOODS AND SERVICES BALANCE
• 3. NET UNILATERAL TRANSFERS

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Balance of Payments

• There is also a set of asset flows referred to as
  the
• CAPITAL ACCOUNT BALANCE
• 4. NET CHANGES IN FOREIGN HOLDINGS OF U.S. ASSETS
• Flows of financial assets and similar claims,
  or
• Foreign direct and other investments in the
  U.S., or
• Private capital flows.
• (Note that we are talking direct and portfolio
  investments here).

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Balance of Payments

• 5. NET OFFICIAL INTERNATIONAL RESERVE
  TRANSACTION
• Foreign official holdings of U.S. assets,
• U.S. holdings of official reserve (gold and
  foreign exchange) assets
• or, Official asset flows.

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All Together Now

• 1. MERCHANDISE OR TRADE BALANCE
• 2. GOODS AND SERVICES BALANCE
• 3. NET UNILATERAL TRANSFERS
• 4. NET CHANGES IN FOREIGN HOLDINGS OF U.S.
  ASSETS
• 5. NET OFFICIAL INTERNATIONAL RESERVE TRANSACTION

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Balance of Payments

• THE BALANCE OF PAYMENTS IS, THEREFORE, THE SUM OF
  THE CURRENT AND CAPITAL ACCOUNT BALANCES.

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Services in the Balance of Payments

• Note
• Services include travel and tourism, trade
  transportation, insurance, education, financial,
  technical, telecommunications and other business
  and professional services.
• In addition there are royalties, payments for
  capital services besides interest, such as
  dividends, payments for foreign labor, etc.

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Overall Surpluses and Deficits

• What is an overall balance of payments surplus?
  What is an overall deficit?
• A surplus is when the sum of the current account
  plus the private capital account is
  counterbalanced by an accumulation of official
  net assets, so official reserve assets increase.

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Overall Surpluses and Deficits

• What is an overall balance of payments surplus?
  What is an overall deficit?
• If it is in deficit , the sum is counterbalanced
  by an accumulation of official net liabilities,
  so the country sees its official reserve assets
  decline.

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• What Drives Large U.S. Current Account Deficits?
• See Coughlin Pollard and the readings suggested
  in King, if interested. They are very short and
  reassuring.

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• The U.S. currently has a huge current account
  deficit.
• Why do we have it?
• Is it sustainable?

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• The current account balance is the difference
  between domestic saving and domestic investment.
  If domestic saving falls, the US must borrow from
  abroad to finance domestic investment
• US foreign indebtedness is not necessarily bad if
  foreign funds are used towards investment. (p.
  231)

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• Repayment of the debt is potentially a problem if
  foreign funds are used to purchase consumption
  goods since future generations will bear the
  burden of debt.

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• Poole presents evidence that the rising current
  account deficit is associated with rising
  domestic investment, and a significant share of
  foreign investment in the US is equity investment
  which does not have to be repaid. He concludes
  that the US does not have a current account
  disorder. (p. 231)

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• Poole reminds us that a capital and financial
  account surplus is identical to a current
  account deficit because their dollar values are
  identical by the rules of accounting. (p. 236)

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• If a foreign firm builds a production facility in
  the US, the capital and financial account surplus
  increases, which, in turn, means that the U.S.
  current account deficit would increase. (p. 236)
• The rising current account deficit in recent
  years has been accompanied by a rising rate of
  U.S. domestic investment. (p. 237)