International Economics Li Yumei Economics & Management School of Southwest University

International Economics Chapter 13 Balance of Payments

Organization 13.1 Introduction 13.2 Balance of Payments Accounting Principles 13.3 The International Transactions of the United States 13.4 Accounting Balances and Disequilibrium in International Transactions 13.5 The Postwar Balance of Payments of the United States 13.6 The International Investment Position of the United States Chapter Summary Exercises Internet Materials

The Balance of Payments 13.1 Introduction The Balance of Payments Concept It is a summary statement in which, in principle, all the transactions of the residents of a nation with the residents of all other nations are recorded during a particular period of time, usually a calendar year. Function to inform the government of the international position of the nation; to help it in its formulation of monetary, fiscal, and trade policies; to consult the balance of payments of important trade partners in making policy decisions; to inform the banks, firms and individuals directly or indirectly involved in international trade and finance

Explanation Summary statement: aggregation not individual for the nation International transaction: the exchange of goods, services or asset between the residents of one nation and the residents of other nations Residents: holding citizenship Time dimension: one calendar year

13.2 Balance of Payments Accounting Principles Credits(贷方) and Debits (借方) Credit They are those that involve the receipt of payments from foreigners. Credit transactions are entered with a positive sign(+).(收为贷方) Debit They are those that involve the payments to foreigners. Debit transactions are entered with a negative sign (-).(支为借方)

Explanation Credits (+) transactions (receipt of payments from foreigners) : Export of goods and services, unilateral transfers (gifts) received from foreigners and capital inflows are credits(+) Debits (-) transactions (payments to foreigners) : Import of goods and services, unilateral transfers (gifts) made to foreigners and capital outflows are debits (-) Capital inflows: It can take the form of either an increase in foreign assets (purchase foreign stocks) in the nation or a reduction (sell foreign stocks) in the nation’s assets abroad Capital outflows: It can take the form of either an increase in the nation’s foreign assets (purchase foreign stocks) abroad or a reduction (sell foreign stocks) in the nation’s assets abroad

Double-Entry Bookkeeping Concept It means that each international transaction is recorded twice, once as a credit and once a debit of an equal amount. This is because in general every transaction has two sides. Total debits equal total credits. Examples Textbook: page from 432-433 Problems Textbook: 1-8 page 449-450

13.3 The International Transactions of the United States Case Study 13-1(page 435) The major Goods Exports and Imports of the United States Exports of goods, services, and income Imports of goods, services, and income Unilateral transfer, net US-Owned assets abroad Foreign-owned assets in the US, net Allocation of special drawing rights Statistical discrepancy

Current Account & Capital Account 13.4 Accounting Balances and Disequilibrium in International Transactions Current Account & Capital Account Current Account The Account that includes all sales and purchases of currently produced goods and services, income on foreign investments, and unilateral transfer Capital Account The change in the nation’s assets abroad and foreign assets in the nation , other than official reserve assets

Autonomous Transactions & Accommodating Transactions Autonomous Transactions （自主性交易）International transactions that take place for business or profit motives (except for unilateral transfers) and independently of balance-of-payments considerations; also called above–the-line-terms. Accommodating transactions （调节性交易） Transactions in official reserve assets required to balance international transactions; also called below-the-line items.

Deficit & Surplus in the Balance of Payment Deficit in the Balance of Payment The excess of debits over credits; equal to the net credit balance in the official reserve account, or accommodating transactions. Surplus in the Balance of Payment The excess of credits over debits in the current and capital accounts, or autonomous transactions; equal to the net debit balance in the official reserve account, or accommodating transactions.

13.5 The Postwar Balance of Payments of the United States Current Account Positive trade balance on goods of the 1960s and negative trade balance in 1970s, very large after 1982 Official Reserve Balance First large balance deficit in 1970, in 1996 all-time-high-balance of-payments deficit (positive official settlements represents a deficit in international transactions, while negative balance represents a surplus

Case Studies of U.S. Balance with its major trading partners Case 1: The U.S. Trade Deficit with Japan FIGURE 13-1 The U.S. Trade Balance with Japan in Goods and in Goods and Services, 1980-2001.

Case Studies of U.S. Balance with its major trading partners Case 2: The U.S. Trade Deficit with China FIGURE 13-2 U.S. Exports, Imports, and Net Trade Balance in Goods with China, 1985-2001 (billions of dollars).

13.6 The International Investment Position o f the United States Concept of International Investment Position It measures the total amount and the distribution of a nation’s assets abroad and foreign assets in the nation at the end of the year. The balance of payments represents a flow concept(流量), and the international investment position represents a stock concept (存量） It can be used to project the future flow of income or earnings from the nation’s foreign investments and the flow of payments on foreign investments in the nation.

USA International Investment Position Two different measures: one the values foreign direct investments at current costs, the other the values foreign direct investments at market prices Net international investment position with foreign direct investment measured at current cost, deteriorated sharply from 1980 to 1985, 1990, 1995, at the end of 2001 (see page 445 table 13.5) U.S.,-owned assets abroad increased 6.6 times form 1980 to 2001 Conclusion: net debtor nation between 1985 and 1990; rapid rise in foreign holdings of U.S. securities and bank claims resulted primarily from higher interest rates and greater political stability in U.S. than abroad and half of federal budget deficit during the mid-1980s

Chapter Summary Concept of the balance of payments International transactions: credit or debit transactions Accounting balances and Disequilibrium in international transactions U.S. balance of payments and with its major trading partners International investment position, or balance of indebtedness, measures the total amount an distribution of a nation’s assets abroad and foreign assets in the nation at year end

Exercises: Additional Reading U.S.- China trade problem, see: Federal Reserve Bank of New York, “The Growing U.S. Trade Imbalance with China”, Current Issues in Economics and Finance (New York, Mary 1997) U.S.- Japan trade problems, see: D.Salvatore, The Japanese Trade Challenge and the U.S. response (Washington, D.C.: Economic Policy Institute, 1990) L.D’Andrea Tyson, Who’s Bashing Whom? Trade Conflict in High-Technology Industries (Washington, D.C.: Institute for International Economics, 1992)

Internet Materials http://www.bea.doc.gov by clicking “international data” http://webhost.bridgew.edu.baten http://www.bea.doc.gov/bea/pubs.html http://w3.access.gpo.gov/usbudget/fy2003/pdf/2002-erp.pdf http://www.unctad.org/en/docs/wir99ove.pdf http://www.oecd.org