BALANCE OF PAYMENTS
BALANCE OF PAYMENTS
Balance sheet recording trade with the rest of the world
Double-Entry Bookkeeping
Credits are items that bring money into the country
Debits are items that take money out of the country
Credits > Debits: surplus
Debits > Credits: deficit
Current Account
balance of trade in merchandise, services, investment income, and unilateral transfers
Financial Account
balance of trade in financial assets, items that finance the current account
*direct investment: transactions that result in the ownership of 10% or more in a business
*security purchases: net purchases of equity and debt bank claims and liabilities: loans, acceptances, deposits, etc.
*U.S. government assets abroad: changes in U.S. official reserve assets (gold, SDRs, foreign currency holdings, and reserve position in the IMF)
*foreign official assets in the U.S.: net purchases of U.S. government securities, and changes in liabilities to foreign official agencies reported by U.S. banks
Example
Simplified U.S. Balance of Payments (million $)
Credits Debits Net
Merchandise 440,138 536,276 -96,138
Services 179,710 123,299 56,411
Investment Income 110,612 104,391 6,220
Unilateral transfers -32,895
CURRENT ACCOUNT -66,400
U.S.-owned assets abroad -50,961
foreign-owned assets in the U.S. 129,579
FINANCIAL ACCOUNT 78,618
STATISTICAL DISCREPANCY -12,218
Classifying Transactions
1. 10 year loan of $1 million made to a Romanian firm (funded by the creation of a $1 million deposit owned by the firm in a U.S. bank)
2. A U.S. firm sells $1 million worth of wheat to the Romanian firm. Wheat is paid for by the bank account created in 1.
3. A U.S. resident receives $10,000 in interest from German bonds she owns. The $10,000 is deposited in a German bank.
4. A U.S. tourist travels to Europe and spends the $10,000 German deposit.
5. The U.S. government gives $100,000 worth of grain to Nicaragua.
Balance of Payments "Equilibrium"
Is a deficit bad and a surplus good?
Can everyone have a surplus?
There can be equilibrium current account deficits if there is a demand for a country's securities (like the case of the U.S.)
Large U.S. current account deficits are related to large Federal budget deficits
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