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Chapter 13

Balance ofPayments

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on The balance of payments is asummary statement in which, inprinciple,all the transactions of theresidents of a nation with theresidents of all other nations arerecorded during a particularperiod of time,usuwalny a calendar year.

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on The main purpose of the balance ofpayments is to inform thegovernment of the internationalposition of the nation and to help it inits formulation of monetary, scal,and trade policies.

!overnments also regularly consultthe balance of payments to importanttrade partners in ma"ing policydecisions.

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on The informationcotainedin a nation#s balance ofpayments is alsoindispensable toban"s, rms, and

individuals directly orindirectly involved ininternational trade and

nance.

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on$s a summary statement, thebalance of payments aggregates allmerchandise trade into a few ma%orcategories.

The balance of payments includes

some transactions in which theresidents of foreign nations are notdirectly involved & for e'ample, whena nation#s central ban" sells a portionof its foreign currency holdings to the

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on$n international transaction refers to thee'change of a good, service, or asset (forwhich no payment is re)uired* are alsoincluded in a nation#s balance ofpayments.

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on The )uestion of who is a resident of a nationalso re)uires some clari cation.+iplomats,military personnel,

tourists,

and wor"ers

who temporarily migrate are residents of thenationin which they hold citi enship.

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on$ wor"er may start by emigrating temporarily andthen decide to remain abroad permanently.International institutions such as- The nited /ations,

The International 0onetary und (I0 *,

The 2orld Ban",

and The 2orld Trade rgani atin (2T *

are not residents of the nation in which they arelocated.

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Credits and+ebits

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Credits and +ebits

International transactions are classi ed ascredits or debits. Credit transactions are

those that involve the receipt of paymentsfrom foreigners. +ebit transactions arethose that involve the ma"ing of paymentsto foreigners. Credit transactions are

entered with a positive sign, and debittransactions are entered with a negativesign in the nation#s balance of payments.

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Credit and +ebits

Capital in4ows can ta"e either of twoforms- an increase in foreign assets in thenation or a reduction in the nation#s assetsabroad.

Capital out4ows can ta"e the form ofeither an increase in the nation#s assetsabroad or a reduction in foreign assets inthe nation because both involve apayment to foreigners.

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+ouble&5ntry

Boo""eepingIn recording a nation#s internationaltransactions, the accounting procedure"nown as double&entry boo""eeping isused. The means that each internationaltransaction is recorded twice, once as acredit and once as a debit of an e)ualamount. The reason for this is that ingeneral every transaction has two sides.2e sell something and we receivepayment for it.

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The International Transactions of the

nited 6tates

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The International Transactions of the

nited 6tates The nited 6tates imported goods andservices (including income payments onforeign assets in the nited 6tates* for 78

billion i n 899:. !oods imports includedpetroleum, automobiles, householdappliances, transportation servecespurchased by .6. residents from other

nations, fees nad royalties paind toforeigners, as well asthe interest anddividends paid on foreign investments inthe nited 6tates.

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The International Transactions of the

nited 6tates The in4ow of foreign capital into the

nited 6tates is recorded as acredit under

capital (an increase of foreign&ownedassets in the nited 6tates*, while thepayments made to foreigners for theservices of the foreign capital invested in

the nited 6tates are recorded as a debitwith other imported services in the .6.balance of payments.

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The International Transactions of the

nited 6tates The o;cial reserve assets of the nited 6tatesinclude the gold holdings of .6. monetaryauthorities, 6pecial +rawing

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$ccount Balances and+ise)uilibrium inInternational Transactions Thus, the current account lumps together

all sales and purchases of currentlyproduced goods and services, investment

incomes, and unilateral transfers andprovides the lin" between the nation#sinternational transactions and its nationalincome. 6peci cally, a current account

surplus stimulates domestic productionand income, while a current accountde cit dampens domestic production andincome.

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$ccount Balances and+ise)uilibrium inInternational Transactions The change in the .6. & owned assets

abroad of foreign&owned assets in thenited 6tates, other than o;cial reserve

assets, gives the capital account of thenited 6tates. This measures the change

in the stoc" of all nonreserve nancialassets. The %usti cation for e'cluding

nancial reserve assets drom the capitalaccount is that changes in reserves re4ectgovernment policy rather than mar"etforces.

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$ccount Balances and+ise)uilibrium inInternational Transactions

$ll transactions in the current and capitalaccounts are called autonomous transactionsbecause they ta"e place for business or pro tmotives (e'cept for unilateral transfers* andindependently of balance&of&payments

considerations. $utonomous items aresometimes referred to as =the items above theline>. n the other hand, transactions in o;cialreserve assets are called accomodatingtransactions (or =items below the line>* because

they result from and are needed to balanceinternational transactions. The accomodating orbelow&the line items from the o;cial reserveaccount, and the balance on the o;cial reserveaccount is called the o;cial settlementsbalance.

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$ccount Balances and+ise)uilibrium inInternational Transactions

If total debits e'ceed total credits in the currentand capital accounts, the net debit balancemeasures the de cit in the nation#s balance ofpayments. This de cit must then be settled withan e)ual net credit in the o;cial reserve

account. Thus, a de cit in the balance ofpayments can be measured either by the e'cessof debits over credits in the current and capitalaccounts or by the e'cess of credits over debitsin the current and capital accounts. n the other

hand, a nation has a surplus in the balance ofpayments if its total credits e'ceed its totaldebits in the current and capital accounts. Thenet credit balance gives the si e of the surplusand is settled by an e)ual debit balance in theo;cial reserve account.

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$ccount Balances and+ise)uilibrium inInternational Transactions

This method of measuring the de cit (orsurplus* in the balance of payments (as

well as the concept itself* is strictlycorrect, however, only under a 'ede'change rate system (as we had from theend of 2old 2ar II until 1?@3* and not

under a 4e'ible e'change rate system or amanaged e'change rate system (that wehave had since then*.

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The InternationalInvestment Position ofthe nited 6tates2hile a nation#s balance of paments

measures the international 4ow of goods,services, and capital during a one&yearperiod, the international investmentposition measures the total amount andthe distribution of a nation#s assets abroadand foreign assets in the nation at the endof the year. Thus, the balance of paymentsrepresents a 4ow concept, and theinternational investment position (oftencalled the balance of internationalindebtedness* represents a stoc" concept.

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The InternationalInvestment Position ofthe nited 6tates The statement of a nation#s internationalinvestment position can be used to pro%ect the

future 4ow of income or earnings from thenation#s foreign investments and the 4ow ofpayments on foreign investment in the nation.

urthermore, adding the nation#s capital 4owsduring a particular year to its internationalinvestment position at the end of the previousyear should give the international investmentposition of the nation at the end of the particularyear, in the absense of a statistical disrepancyand if the stoc" of .6. direct investmentsabroad and foreign direct investments in the

nited 6tates were revaluated to re4ect price

and e'change rate changes during the year