1. International Economics By Robert J. Carbaugh 7th Edition
Chapter 11:
The balance of payments

2. The 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. Double-entry accounting in the BOP
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. Double-entry accounting (cont’d)
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. Current account Goods and services balance Investment income
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. Capital account All purchases or sales of assets, including:
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 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. US Balance of Payments, 1997 ($ bill.)
Current account
Merchandise trade
exports $678.3
imports
Net
Services
military trans. (net) 3.8
other services, net 81.5
All services, net 85.3
Balance on goods & services
Investment income, net
Cont’d.
Carbaugh, Chap. 11

9. 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
Balance on current account $-166.5
Carbaugh, Chap. 11

10. 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
All changes, net
Changes in foreign assets in the US, net
foreign official assets 18.2
foreign private assets 672.3
All changes, net
Allocation of SDRs 0
Statistical discrepancy
Balance on capital account
Carbaugh, Chap. 11

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

12. Balance of international indebtedness
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