Balance-of-Payments Accounts and Net Financial Flows

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Balance-of-Payments Accounts and Net Financial
Flows

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Financial Inflow

• Balance of Payments is a flow account, which
  consists of the current account and the capital
  and financial account
• A flow of capital, real and/or financial, into a
  country, takes the form of increased purchases of
  domestic assets by foreigners and/or reduced
  holdings of foreign assets by domestic residents.
  Inflows are recorded as positive, or a credit, in
  the capital and financial account.
• Each country also has an international balance
  sheet, which is a stock account which shows
  assets and liabilities abroad and foreign assets
  and liabilities at home -- Called the
  international investment positions
  accounts in the U.S. (the accumulated stocks of
  U.S.-owned assets abroad and of foreign-owned
  assets in the United States) .
• The net change in the international investment
  positions accounts from the beginning of one year
  to the end of the next is the net
  capital/financial flow for the year

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Exchange and Net Flows

• Exchange of Real Assets exchange of goods and
  services for other goods and services or for
  financial claims (will give rise to a net change
  in financial claims if x?m)
• Exchange of Financial Assets Exchange of
  financial claims for other financial claims (net
  financial claims are unchanged)
• Hence, m-x net capital flow, also I-S
• ignoring reporting errors and official
  settlements

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Balance of Payments Statistics for theUnited
States, 1966(Amounts in millions of dollars)

• Sources of Foreign Exchange
• Exports of Goods and Services 43,142
• Balance on goods, services, remittances, and
  pensions 4065
• Foreign Capital Flow, net 2,532
• Balance of all of the above -1357
• Change in U.S. Reserve Assets 568
• Change in Liquid Liabilities of Foreign Accounts
  789
• .

• Uses of Foreign Exchange
• Imports of Goods and Services 38,063
• Remittances and Pensions 1,015
• U.S. Government grants, net 3,444
• U.S. private Capital Flow, net 4,298
• Errors and Omissions 210
• Source Federal Reserve Bulletin, April 1969, pp
  A70-71

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The Balance of Payments Accounting System

• International Bookkeeping

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International Transactions Accounts (Balance of
Payments)

• A quarterly statistical summary of transactions
  between U.S. and foreign residents organized into
  three major categories
• The current account
• The capital account
• The financial account

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Balance of Payments

• System of accounts which is a subset of the
  National Income and Production Accounts
• A double-entry bookkeeping system.
• Debit Entries Transactions that generate a
  payment outflow (e.g., import).
• Credit Entries Transactions that generate a
  payment inflow (e.g., export).

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Balance of Payments

• The current account includes exports and imports
  of goods, services, income, and current
  transfers.
• Goods
• Services
• Income Receipts and Payments
• Unilateral Transfers

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Balance of Payments

• Goods Exports and imports of tangible items.
• Services Exports and imports of services, for
  example
• Typical business services such as banking and
  financial services, insurance, and consulting.
• Tourism

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Balance of Payments

• Income Receipts Includes items such as
• Investment income on US-owned assets abroad.
• Receipts of income on US direct investment
  abroad.
• Government income receipts

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Balance of Payments

• Income Payments Includes items such as
• Investment income on foreign-owned assets in the
  United States.
• Payments of income on foreign direct investment
  in the United States
• US Government income payments

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Balance of Payments

• Unilateral Transfers Includes items such as
• Government grants abroad
• Private remittances
• Private grants abroad

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Balance of Payments (2000)
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Balance of PaymentsThe Financial Sector

• In June 1999, US capital account definitions were
  modified to bring them more in line with
  definitions recommended by the International
  Monetary Fund.
• Now there are two accounts
• The capital account includes capital transfers,
  such as debt forgiveness.
• The financial account includes transactions for
  official assets, for U.S. Government assets other
  than official reserve assets, for direct
  investment, for portfolio investment, and for
  other investment.

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Balance of PaymentsThe Financial Sector

• The new Capital Account includes items that were
  previously included in unilateral transfers, such
  as
• Debt forgiveness
• Migrants transfers (as they leave the country).
• The new capital account is small for the US (lt
  0.1 percent of capital flows), but expected to
  grow.

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Balance of PaymentsThe Financial Sector

• The Financial Account
• Records international transactions in the
  financial sector
• Includes portfolio and foreign direct investment
• Includes changes in banks and brokers cash
  deposits that arise from international
  transactions.

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Balance of PaymentsThe Financial Sector

• US-Owned Assets Abroad Increase or decrease in
  US ownership of foreign financial assets.
• Foreign-Owned Assets in the US Increase or
  decrease in foreign ownership of domestic assets.
• Reserve Assets Primarily the assets of central
  banks.

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Balance of PaymentsThe Financial Sector

• Portfolio Investment Individual or business
  purchase of stocks, bond, or other financial
  assets or deposits. (An income strategy)
• Foreign Direct Investment Purchase of financial
  assets that results in a 10 percent or greater
  ownership share. (A financial control strategy)

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Capital and Financial Account (2000)
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The Balance of PaymentsThe Statistical
Discrepancy
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International Allocation of Capital
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Feldstein - Horioka

• Savings and Investment Relation
• Based on a closed economy income condition
• y c i g.
• Rearrange as
• y - c - g i.

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Feldstein - Horioka

• Rearranged as
• y - c - g i.
• Note that y - c - g equals savings, s. Then
• s i.
• In a closed economy, domestic investment is equal
  to domestic saving by definition, but is also
  correlated in practice, i.e., correlation
  coefficient is necessarily close to 1 in value.

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International Flow of Goods, Services, Capital

• Domestic Savings and Investment NFF
• National Income (GNY) Consumption (C) Savings
  (S)
• National Spending (GNE) Consumption (C)
  Investment (I)
• GNY - GNE S - I
• GNY - GNE Exports (x) - Imports (m)
• S - I x - m
• Net Foreign Investment x - m

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Government Budget Deficits and NFF

• GNE Household spending Private I Government
  spending
• GNY - Private S - Taxes Private I
  Government spending
• GNE - GNY Private (I - S)
  GovDeficit/Surplus
• NFF Private savings surplus - GovDeficit

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US Balance of Payments
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• Basic Premise

A current account deficit must be financed by
capital inflows, or it cannot be incurred in the
first place
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FACT

• Over 1982-2003, U.S. current account deficits
  have averaged 183 billion per year.
• 4 trillion worth of assets have been transferred
  to foreign ownership.

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Trade and Scale Variables I
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Scale Variables I

• U.S. monthly GDP 1 trillion
• Monthly goods and services exports 130 billion
  13
• Monthly goods and services imports 185 billion
  18.5
• Balancing item net capital flow 55 billion
  5.5

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Scale Variables II

• U.S. GDP per worker 84,000 per year
• Exports of 10,900 per year
• Imports of 15,500 per year

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Result

• Foreign claims on U.S. assets now exceed U.S.
  claims on foreign assets by about 2.7 trillion.
• Storing up purchasing power for the future
• Private political risk insurance
• Public political risk insurance

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International Investments(market value, end-2003)

• U.S. foreign investments 7.9 trn
• Foreign investments in U.S. 10.5 trn
• Net -2.7 trn
• Much of this capital inflow has been portfolio
  investment.
• Some has been direct investment.

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Foreign Direct Investment(market value, end-2003)

• U.S. DI abroad 2.7 trillion
• Foreign DI in U.S. 2.4 trillion
• Net 0.3 trillion

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Direct Investment Positions
At current market value, trillion
U.S. Direct Investment Abroad
Foreign Direct Investment in U.S.
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