International Economics By Robert J. Carbaugh 7th Edition

1. International EconomicsBy Robert J. Carbaugh7th Edition Chapter 11: The balance of payments

2. The Balance of Payments Balance of Payments • A record of international transactions between residents of one country and the rest of the world • International transactions include exchanges of goods, services or assets • “Residents” means businesses, individuals and government agencies, including citizens temporarily living abroad but excluding local subsidiaries of foreign corporations Carbaugh, Chap. 11

3. The Balance of Payments Double-entry accounting in the BOP • All transactions are either debit or credit transactions • Credit transactions result in receipt of payment from abroad • Merchandise exports • Transportation and travel receipts • Income received from investments abroad • Gifts received from foreign residents • Aid received from foreign governments • Local investments by overseas residents Carbaugh, Chap. 11

4. The Balance of Payments Double-entry accounting(cont’d) • Debit transactions lead to payments to foreigners • Merchandise imports • Transportation and travel expenditures • Income paid on investments of foreigners • Gifts to foreign residents • Aid given by home government • Overseas investments by home country residents • Each credit transaction has a balancing debit transaction, and vice versa, so the overall balance of payments is always in balance Carbaugh, Chap. 11

5. Structure of the Balance of Payments Current account • Goods and services balance • Merchandise trade balance • Services balance • Investment income • Unilateral transfers • Private transfer payments • Governmental transfers Carbaugh, Chap. 11

6. Structure of the Balance of Payments Capital account • All purchases or sales of assets, including: • Direct investment • Securities (debt) • Bank claims and liabilities • Official settlements transactions Carbaugh, Chap. 11

7. Current account Current account surplus and deficit • Current account and capital account balance each other; when one is in surplus the other must be in deficit • Current account surplus means exports of goods and services, investment income and transfers exceed imports and outflows • Current account deficit means imports of goods and services, and outflows are greater than exports and inflows; must be financed by borrowing (capital account inflows) Carbaugh, Chap. 11

8. Balance of Payments US Balance of Payments, 1997 ($ bill.) Current account Merchandise trade exports $678.3 imports -877.2 Net -198.9 Services military trans. (net) 3.8 other services, net 81.5 All services, net 85.3 Balance on goods & services -113.6 Investment income, net -14.3 Cont’d. Carbaugh, Chap. 11

9. Balance of Payments US Balance of Payments, 1997 ($ bill.) Current account (cont’d) Unilateral transfers US government grants -11.6 US govt pensions, and other transfers -4.2 Private remittances and other transfers -22.8 All transfers, net -38.6 Balance on current account $-166.5 Carbaugh, Chap. 11

10. Balance of Payments US Balance of Payments, 1997 ($ bill.) Capital account Changes in US assets abroad, net US official reserve assets -1.0 other US govt assets 0.2 US private assets -426.1 All changes, net -426.9 Changes in foreign assets in the US, net foreign official assets 18.2 foreign private assets 672.3 All changes, net 690.5 Allocation of SDRs 0 Statistical discrepancy -97.1 Balance on capital account 166.5 Carbaugh, Chap. 11

11. Balance of Payments US Balance of Payments 1970-97 ($ bill.) Carbaugh, Chap. 11

12. Balance of Payments Balance of international indebtedness • Summarizes one nation’s overall quantity of assets and liabilities against the rest of the world • Shows whether the nation is a net debtor or a net creditor • Indicates sensitive items, such as short term debt held by foreigners which could be liquidated quickly, straining finances Carbaugh, Chap. 11