Carbaugh, Chap Balance of Payments Keep track of international transactions between residents of a country and the rest of the world International transactions include exchanges of goods, services and assets (bank deposits,stocks,bonds,real estate,factories) Residents of a country include citizens who are temporarily living abroad and foreign-owned enterprises that have a facility in the country  Although a corporation is considered to be a resident of the country in which it is incorporated, its overseas branch or subsidiary is not. ??? Carbaugh, International Economics

Carbaugh, Chap The Balance of Payments  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 foreign residents

Carbaugh, Chap The Balance of Payments  Debit transactions lead to payments to foreigners  Merchandise imports  Transportation and travel expenditures  Income paid on investments of foreigners  Gifts to foreigners (residents of other lands)  Foreign aid given by home government  Overseas investments by home country residents

Carbaugh, Chap Structure of the Balance of Payments Current account: payment for currently produced goods and services  Goods and services balance  Merchandise trade balance  Services balance  Investment income (net)  Paid for “capital services”  Unilateral transfers  Private transfer payments  Governmental transfers

Carbaugh, Chap Structure of the Balance of Payments Capital account  All purchases or sales of assets, including:  Direct investment  Securities (debt) … “Portfolio investment”  Bank claims and liabilities  Official settlements transactions

Carbaugh, Chap Current account surplus and deficit  Current account and capital account balance each other.  The balance of payments “balances” C + I + G + (X – Im) = Y = T + S + C Trade deficit is matched by capital inflows  (Im – X) = (I – S) + (G – T) Capital In = National Borrowing

Carbaugh, Chap US Balance of Payments, 1999 ($ bill.) Balance of Payments Current account Merchandise trade exports$683.0 imports-1,030.1 Net Services Travel & transport recpts.5.3 other services, net74.3 All services, net79.6 Balance on goods & services Cont’d.

Carbaugh, Chap US Balance of Payments, 1999 ($ bill.) Balance of Payments Current account (cont’d) Income receipts & payments investment income, net-19.1 employee compensation-5.7 All income, net-24.8 Unilateral transfers, net-46.6 Balance on current account$-338.9

Carbaugh, Chap US Balance of Payments, 1999 ($ bill.) Balance of Payments Capital account Changes in US assets abroad, net US official reserve assets$8.7 other US govt assets-0.4 US private assets All changes, net Changes in foreign assets in the US, net foreign official assets44.6 foreign private assets706.2 All changes, net750.8 Allocation of SDRs0 Statistical discrepancy-39.2 Balance on capital account$338.9

Carbaugh, Chap US Balance of Payments Balance of Payments ($ bill.)

Carbaugh, Chap Balance of Payments Is a current account deficit a problem?  Current account deficit has little to do with foreign trade practices or competitiveness  Current account deficit is determined mostly by domestic macro-economic conditions: domestic demand exceeds supply and increases imports  Paid for by borrowing  A prosperous America goes shopping on credit