BALANCE OF PAYMENTS

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BALANCE OF PAYMENTS

• Record of all economic transactions during a
  given period between the country's residents
  the rest of the world.
• Economic transactions include exchanges of goods,
  services or assets.

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Residents

• Individuals Tourists, diplomats, military
  personnel, temporary migrant workers are
  residents of country from which they come
• Institutions Foreign affiliates of U.S. firms
  are residents of the country of location
• The government

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Credits () Debits (-)

• Credits are transactions that give rise to a
  receipt from the rest of the world
• Export of goods, services or assets
• Debits are transactions that give rise to a
  payment to the rest of the world
• Import of goods, services or assets

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Double-entry Accounting

• Each credit transaction has a balancing debit
  transaction vice versa, so the overall balance
  of payments is always in balance

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Merchandise Trade

• Export of goods ()
• Import of goods (-)
• Merchandise Trade Balance is affected by exchange
  rates income changes, monetary fiscal growth,
  unexpected supply shocks international
  competitiveness
• All exports imports must be registered through
  customs. Reported every month

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Services

• Military transactions (net)
• Receipts from travel transportation (net)
• Transportation Ocean freight, pipe lines,
  international transportation
• Travel Within a foreign country, food, lodging,
  entertainment etc.
• License fees, royalties, rents
• Private services Insurance, engineering,
  consulting, brokerage, telephone, banking
• Govt. services Expenditure on embassies,
  consulates
• Goods Services Balance determines trade deficit
  or surplus. It is included in the GDP.

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Investment Income

• Income on U.S. investment abroad (net)
• Credit items are Interests and dividends earned
  from foreign investment
• Goods, Services Investment Income Balance.

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Unilateral Transfer

• Transfers made to foreigners (appear as debit
  item)
• Private Gifts
• Government
• Grants, aids, Pension checks to foreign workers
  who moved back home

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Current Account Balance (CAB)

• CAB includes Goods, Services Income balance
  Unilateral Transfer
• It measures the net acquisition of foreign
  assets--the net foreign investment--by the
  country as a whole

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Current Account Deficit means

• imports of goods, services, investment income
  transfer payments exceed exports of those
• domestic expenditure exceeds income
• home country becomes the net demander of funds
  from abroad that must be met by borrowing or by
  selling assets (capital financial account
  inflows)
• Borrowing can be divided into govt. private
  CAB deficit (G T) (I S)
• worsening net foreign investment position
• Does not mean countrys inability to sell goods
  in the world market

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U.S. assets abroad

• Net purchase of foreign assets by residents
  (capital outflow).
• Increases in holdings of international reserves
  by the Central Bank.
• Increases in U.S. govt. assets (e.g. new loans)
• Increases in U.S. private assets abroad
• direct private foreign investment
• buying foreign real state
• Buying 10 or more of voting securities
• portfolio investment in foreign assets, private
  loans to foreigners

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Foreign assets in the U.S.

• Net sales of domestic assets to foreigners
  (capital inflow)
• Increases in foreign official assets in U.S.
• Purchase of CDs, Treasury Bills by foreign
  Central Banks
• Increases in other foreign assets in U.S.

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Statistical discrepancy

• Arises because of measurement errors physical
  inability of recording instantaneously all
  international transaction

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Capital Financial Account Balance (KAB)

• includes changes in U.S. foreign governments
  private assets, statistical discrepancy.
• It represents a net acquisition of U.S. assets by
  foreigners.

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Official Reserve Settlements Balance (ORSB)

• It represents net balance on all the transactions
  except those engaged by domestic foreign
  Central Banks in changing their international
  reserves.

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Is CAB deficit a problem?

• The benefit of CAB deficit is the ability to push
  current spending beyond current production.
  However, the cost is the debt service that must
  be paid.
• Debt is good or bad depends on whether the
  deficit is being used to finance more consumption
  or more investment.

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Can U.S. run CAB deficit indefinitely?

• As long as investment opportunities are large
  enough to provide foreigners with competitive
  rates of return.
• U.S. ran CAB deficit from 1820 to 1875 when U.S.
  was poor relative to Europe but rapidly growing.
• After WWI, U.S. was richer with limited
  investment opportunities. Cab surplus between
  1920 1970.
• During last 25 years, a stable political
  monetary environment, rapidly growing labor force
  made U.S. an attractive place to invest.

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Can U.S. run CAB deficit indefinitely?

• Consequence of CAB deficit is growing foreign
  ownership of U.S. assets a rising fraction of
  U.S. income that must be diverted overseas.
• A serious problem could emerge if foreigners lose
  confidence in U.S. ability to repay reduce the
  fraction of their savings they send to U.S. It
  might cause a sudden fall in the dollar value a
  sharp rise in the interest rates.

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Balance of international indebtedness

• Summarizes one nations overall quantity of
  assets liabilities against the rest of the
  world
• Shows whether the nation is a net debtor or a net
  creditor
• Claims on foreigners exceed (fall short of)
  foreign claims on the U.S.
• Indicates sensitive items, such as short term
  debt held by foreigners which could be liquidated
  quickly, straining finances
• Taken on December 31.

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International Investment Position of the U.S. at
Year-End (Billion )
Type of Investment 1985 1990 1995 2000  

• U.S. Assets Abroad
• U.S. government assets 205.7 257.7
  257.2 213.6
• U.S. Private assets 1067.1 1893.3
  3148.6 5953.6
• Total 1272.8 2150.0 3405.8
  6167.2
•  

Foreign Assets in the U.S. Foreign official
assets 202.5 373.3
671.7 922.4 Other foreign assets
1012.9 2017.2 3234.2 7087.5 Total
1215.4 2390.5 3905.9
8009.9   Net Int. Investment Position 57.4
-240.5 -500.1 -1842.7
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In Search for International Data

• Go to International then Data to get balance of
  payments, exports imports international
  investment position of the U.S. http//bea.gov/
• White House Briefing Room http//www.whitehouse.g
  ov/fsbr/international.html