An Introduction to International Economics Chapter 10: Balance of Payments Dominick Salvatore John Wiley & Sons, Inc. Dale R. DeBoer University of Colorado, Colorado Springs

Balance of payments The balance of payments provides a summary statement of international transactions for a nation for a specified period of time. The balance of payments converts international transactions into dollar terms at the going rate of currency exchange.

Key categories Credit transactions Transactions that involve receipt of payments from foreign sources. Major types Exports of goods and services Capital inflows Increases in foreign assets in a nation Decreases in a nation’s assets abroad

Key categories Credit transactions Debit transactions Transactions that involve payment to foreign sources. Major types Imports of goods and services Capital outflows Increases in a nation’s assets abroad Decreases in foreign assets in a nation

Double entry bookkeeping In balance of payment accounting, each international transaction is recorded twice – once as a credit, once as a debit. Examples $500 in exports to be paid in 3 months time Credit (+) Debit (-) Goods export $500 Capital outflow

Double entry bookkeeping Examples $500 in exports to be paid in 3 months time $200 spent by a US tourist in London on services Credit (+) Debit (-) Service import $200 Capital outflow

Double entry bookkeeping Examples $500 in exports to be paid in 3 months time $200 spent by a US tourist in London on services $100 in US government foreign aid given to the government of a developing nation Credit (+) Debit (-) Unitlateral transfer $100 Capital outflow

Double entry bookkeeping Examples $500 in exports to be paid in 3 months time $200 spent by a US tourist in London on services $100 in US government foreign aid given to the government of a developing nation $400 in foreign stocks paid for by increasing foreign bank balances in the U.S. Credit (+) Debit (-) Capital outflow (stock) $400 Capital inflow (bank balance)

The balance of payments for the U.S. 2003 data from the Bureau of Economic Analysis in billions of U.S. dollars WWW link Exports of goods and services and income receipts 1,314.9 Exports of goods and services 1,020.5 Goods, balance of payments basis 713.1 Services 307.4 Transfers under U.S. military agency sales contracts 12.5 Travel 64.5 Passenger fares 15.7 Other transportation 31.8 Royalties and license fees 48.2 Other private services 133.8 U.S. Government miscellaneous services 0.8 Income receipts 294.4 Income receipts on U.S.-owned assets abroad 291.4 Direct investment receipts 187.5 Other private receipts 99.1 U.S. Government receipts 4.7 Compensation of employees 3.0

The balance of payments for the U.S. Exports of goods and services and income receipts 1,314.9 Exports of goods and services 1,020.5 Goods, balance of payments basis 713.1 Services 307.4 Transfers under U.S. military agency sales contracts 12.5 Travel 64.5 Passenger fares 15.7 Other transportation 31.8 Royalties and license fees 48.2 Other private services 133.8 U.S. Government miscellaneous services 0.8 Income receipts 294.4 Income receipts on U.S.-owned assets abroad 291.4 Direct investment receipts 187.5 Other private receipts 99.1 U.S. Government receipts 4.7 Compensation of employees 3.0 Service exports These factors show the source of total service exports. Income receipts are primarily income earned on past investment activities abroad.

The balance of payments for the U.S. Imports of goods and services and income payments -1,778.1 Imports of goods and services -1,517.0 Goods, balance of payments basis -1,260.7 Services -256.3 Direct defense expenditures -25.1 Travel -56.6 Passenger fares -21.0 Other transportation -44.8 Royalties and license fees -20.0 Other private services -85.8 U.S. Government miscellaneous services -3.0 Income payments -261.1 Income payments on foreign-owned assets in the United States -252.6 Direct investment payments -68.7 Other private payments -111.9 U.S. Government payments -72.0 Compensation of employees -8.5 Unilateral current transfers, net -67.4 U.S. Government grants -21.9 U.S. Government pensions and other transfers -5.3 Private remittances and other transfers -40.2

Balance of payments for the U.S. Summary accounts Merchandise trade balance = - $548 billion Goods exports – goods imports Trade balance = - $497 billion Exports of goods and services – imports of goods and services Income balance = $33 billion Current account = -$531 billion Trade balance + income balance + unilateral transfers

The balance of payments for the U.S. U.S.-owned assets abroad, net -283.4 U.S. official reserve assets, net 1.5 Gold … Special drawing rights 0.6 Reserve position in the International Monetary Fund Foreign currencies -0.6 U.S. Government assets, other than official reserve assets, net 0.5 U.S. credits and other long-term assets -7.3 Repayments on U.S. credits and other long-term assets 8.0 U.S. foreign currency holdings and U.S. short-term assets, net -0.2 U.S. private assets, net -285.5 Direct investment -173.8 Foreign securities -72.3 U.S. claims on unaffiliated foreigners reported by U.S. non-banking concerns -28.9 U.S. claims reported by U.S. banks, not included elsewhere -10.4 Main portfolio investment items Direct investment

The balance of payments for the U.S. Foreign-owned assets in the United States, net 829.2 Foreign official assets in the United States, net 248.6 U.S. Government securities 194.6 U.S. Treasury securities 169.7 Other 24.9 Other U.S. Government liabilities -0.6 U.S. liabilities reported by U.S. banks, not included elsewhere 49.4 Other foreign official assets 5.1 Other foreign assets in the United States, net 580.6 Direct investment 39.9 113.4 U.S. securities other than U.S. Treasury securities 251.0 U.S. currency 16.6 U.S. liabilities to unaffiliated foreigners reported by U.S. nonbanking concerns 84.0 75.6 Main portfolio investment items Direct investment

Balance of payments for the U.S. Summary accounts Merchandise trade balance = - $548 billion Trade balance = - $497 billion Income balance = $33 billion Current account = -$531 billion Financial account balance = $544 billion

Balance of payments for the U.S. Summary accounts Merchandise trade balance = - $548 billion Trade balance = - $497 billion Income balance = $33 billion Current account = -$531 billion Financial account balance = $544 billion The balancing factor: statistical discrepancy Arises from the mis-recording of items in the balance of payments accounts Statistical discrepancy = - $12 billion

The ORSB The Official Reserve Settlement Balance (ORSB) measures the change in U.S. official reserve assets and the change in foreign official reserve assets in in the U.S. The ORSB accommodates for a deficit or surplus in autonomous transactions (transactions that occur for business or profit motives).

Historical values Source: Federal Reserve Bank

Historical values Source: Federal Reserve Bank

Historical values Source: Federal Reserve Bank

Historical values Source: Federal Reserve Bank