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

2. 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.

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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)

9. 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

10. 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.

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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).

18. Historical values
Source: Federal Reserve Bank

19. Historical values
Source: Federal Reserve Bank

20. Historical values
Source: Federal Reserve Bank

21. Historical values
Source: Federal Reserve Bank