International Economics II

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International Economics II

• Lecture 1.
• The Balance of Payments
• (????)
• Shandong University of Finance

2
2010????????????

• ???????4?1????2010??????????????????????2010?,
  ?????????????????????????,???????????

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Key Words

• Balance of Payments (BOP)
• ????
• Double-Entry Accounting Principle
• ?????
• Credit and Debit Transactions
• ?????????
• Current Account, Capital Account, Statistical
  Discrepancy
• ??????????????
• International Investment Position
• ??????

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Chapter Overview (Teaching Target)

• After completing this chapter, you should be able
  to
• Define the balance of payments.
• Identify the credit and debit transactions on the
  balance of payments.
• Discuss the current account and the capital
  account of the BOP.
• Identify equilibrium of international payments
  and its economic implications
• Explore the relationship among business cycle,
  economic growth and current account

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Chapter Outline

• I. Why do we need to understand the
  balance-of-payments?
• II. A brief intro. of the balance-of-payments
• III. The structure of the balance-of-payments
• IV. Equilibrium of the balance-of-payments

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I. Why do we need to learn this chapter?

• The contents of the balance-of-payments
• can help you to understand the connection between
  macro-economic activities and micro-economic
  behaviors
• is also the key to understand how people use one
  kind of currency to exchange another one.
• Even the international flow of humans shows up in
  the balance of payments, when the migrants make
  purchases or send money back home

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I. Why do we need to learn this chapter?

• The main purpose of the balance-of-payments is
  to inform the government of the international
  position of the nation and to help it in its
  formulation of monetary, fiscal and the trade
  policies.

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II. A Brief introduction of the Balance of
Payments

• 2.1 Definition of the balance of Payments
• 2.2 Double-Entry Accounting

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2.1 Definition of the balance of Payments

• The balance of payments is a record of the
  economic transactions between the residents of
  one country and the rest of the world (Carbaugh,
  9e)
• (???????????????????????)
• An international transaction is an exchange of
  goods, services, or assets between residents of
  one country and those of another. Its economic
  transaction, not cash basis.
• Residents include businesses, individuals, and
  government agencies

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definition of residents

• ??(residents)???????,?????????????????????????????
  ?????????????????
• ??????????????(????)???????????,??????????????????
  ??????
• ????????????????????????????????????????,?????????
  ??,????????????????,???????????????????
• ?????,??????????????,????????????????????????,????
  ??????????????????,??????????????????????

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2.2 Balance of payments account (Double-Entry
Accounting)

• Double-entry bookkeeping(?????) means that each
  international transaction is recorded twice, once
  as a credit and once as a debit of an equal
  amount
• A credit transaction(????) is one that results in
  a receipt of a payment from foreigners (inflows
  of payments)
• A debit transaction(????) is one that leads
  to a payment to foreigners (payments outflows).

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2.2 Balance of payments account (Double-Entry
Accounting)
Credits () (leading to the receipt of payments from foreigners) Debits (-) (Leading to payments to foreigners)
Merchandise exports Service exports Income received from investments abroad Gifts received from foreign residents Aid received from foreign governments Investments in the home country by overseas residents Official reserve asset reduced Merchandise imports Service imports Income paid on investments of foreigners Gifts to foreign residents Aid given by the home countrys government Overseas investment by home countrys residents Official reserve asset added
Each credit transaction has a balancing debit
transaction, and vice versa, so the overall
balance of payments is always in balance
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• ??
• ?1.??????????????,???????????????120?????
• ??????????? 120??
• ????? 120??
• ?2. ????????,??10??????????????????????????????,??
  ??????????????????????
• ????? 10??
• ??????????? 10??
• ?3. ??????????50????????????,??,??????50???
  ????????
• ??????? 100??
• ????? 50??
• ????
  50??

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III. Balance-of-Payments Structure

• 3.1 Current Account
• 3.2 Capital and Financial Account
• 3.3 Statistical Discrepancy Errors and Omissions

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3.1 Current Account
-Definition

• The current account of the balance payments
  refers to the monetary value of international
  flows associated with transactions in goods and
  services, investment income, and unilateral
  transfers. (Carbaugh, 9e)
• (?????????????,?????????????????????)

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3.1 Current Account
-Merchandise trade

• It includes all of the goods exports or imports
  agricultural products, machinery, autos,
  petroleum, electronics, textiles, and the like.
• The value of merchandise exports is recorded as a
  plus (credit), and the value of merchandise
  imports is recorded as a minus (Debit). Combining
  the exports and imports of goods gives the
  merchandise trade balance.

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3.1 Current Account -Exports and imports
of services

• It refers to trade in the services of factors of
  production land, labor, and capital.
• Included in this category are travel and tourism,
  communications services, royalties,
  transportation costs, banking services and
  insurance premiums. Services also include items
  such as transfers of goods under military
  programs, construction services, legal services,
  technical services, and the like.
• Goods and services balance

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US Balance of Payments, 2001 ( bill.)
Current account Merchandise trade exports 720.8
imports -1,147.4 Net -426.6
(1) Services Travel transport
recpts. 13.4 other services, net 65.4 All
services, net 78.8 (2) (1)(2)(3) Bal
ance on goods services -347.8 (3)
Contd. From Husted, 6e
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3.1 Current Account -Goods and
Services Balance

• Depending on the relative value of exports and
  imports, the balance on the goods and services
  account contributes to the level of a nations
  national product

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3.1 Current Account -Income receipts
and payments

• This item consists of international interest,
  dividend payments and the net earnings of
  domestically owned firms operating abroad that
  is, earning on one countrys investments abroad
  less payments on foreign assets in this country.
• It also includes compensation of employees.

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3.1 Current Account
-Unilateral Transfers

• ????These items include transfers of goods and
  services (gifts in kind) or financial assets
  (money gift) between this country and the rest of
  the world
• Private transfer payments refer to gifts made by
  individuals and nongovernmental institutions to
  foreigners.
• Governmental transfers refer to gifts or
  grants made by one government to foreign
  residents or foreign government
• The current account balance

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US Balance of Payments, 2001 ( bill.)
Current account Merchandise trade exports 720.8
imports -1,147.4 Net -426.6
(1) Services Travel transport
recpts. 13.4 other services, net 65.4 All
services, net 78.8 (2) (1)(2)(3) Bal
ance on goods services -347.8 (3)
Contd.
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US Balance of Payments, 2001 ( bill.)
Current account (contd) Income receipts
payments investment income, net -13.7 employee
compensation -5.4 All income, net -19.1
(4) Unilateral transfers, net -50.5
(5) (1)(2)(4)(5)(6)The current
Account Balance Balance on current account
-417.4 (6)
(From Husted, 6e)
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2010????????? (?? ???)
?? ?? ?? ??
?.???? 3,054 19,468 16,414
A.????? 2,321 17,526 15,206
a.?? 2,542 15,814 13,272
b.?? -221 1,712 1,933
B.?? 304 1,446 1,142
1.???? 122 136 15
2.???? 182 1,310 1,128
C.???? 429 495 66
?.??????? 2,260 11,080 8,820
A.???? 46 48 2
B.???? 2,214 11,032 8,818
1.???? 1,249 2,144 894
2.???? 240 636 395
3.???? 724 8,253 7,528
?.???? -4,717 0 4,717
3.1???? 0 0 0
3.2????? -1 0 1
3.3?????????? -21 0 21
3.4?? -4,696 0 4,696
3.5???? 0 0 0
?.?????? -597 0 597
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III. Balance-of-Payments Structure

• 3.1 Current Account
• 3.2 Capital and Financial Account
• 3.3 Statistical Discrepancy Errors and Omissions

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A complete example of Balance-of-payments(Source
from the US balance-of-payments,2008)
Line Number Category Value (credits , debits -) Value (credits , debits -)
Current Account Current Account Current Account Current Account
1 Exports of goods, services, and income receipts Exports of goods, services, and income receipts 2,591,233
3 Goods Goods 1,276,994
4 Services Services 549,602
13 Income receipts on U.S. assets abroad Income receipts on U.S. assets abroad 761,593
14 Direct investment receipts Direct investment receipts 370,747
15 Other private receipts Other private receipts 385,940
16 U.S. government receipts U.S. government receipts 4,906
18 Imports of goods, services, and income Imports of goods, services, and income -3,168,938
20 Goods Goods -2,117,245
21 Services Services -405,287
30 Income payments on foreign assets in the United States Income payments on foreign assets in the United States -636,043
31 Direct investment payments Direct investment payments -120,862
32 Other private payments Other private payments -349,871
33 U.S. government payments U.S. government payments -165,310
35 Unilateral transfers, net Unilateral transfers, net -128,363
Capital Account Capital Account Capital Account Capital Account
39 Capital account transactions, net Capital account transactions, net 953
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A complete example of Balance-of-payments(Source
from the US balance-of-payments,2008)
(Contd)
Financial Account Financial Account Financial Account
40 U.S. assets abroad (increase/financial outflow -) -106
41 U.S. official reserve assets -4,848
46 U.S. government assets -529,615
50 U.S. private assets 534,357
51 Direct investment -332,012
52 Foreign securities 60,761
53 U.S. claims reported by U.S. nonbanks 372,229
54 U.S. claims reported by U.S. banks 433,379
55 Foreign assets in the United States (increase/financial inflow ) 534,071
56 Foreign official assets in the United States 487,021
63 Other foreign assets in the United States, net 47,050
64 Direct investment 319,737
65 U.S. Treasury securities 196,619
66 U.S. securities other than T-bills -126,737
67 U.S. currency 29,187
68 U.S. liabilities reported by U.S. nonbanks -45,167
69 U.S. liabilities reported by U.S. banks -326,589
71 Statistical discrepancy (sum of above with sign reversed) 200,055
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3.2 Capital and Financial Account

• Capital and financial transactions in the balance
  of payments include all international purchases
  or sales of assets (???????)
• The term assets is broadly defined to include
  items such as titles to real estate, corporation
  stocks and bonds, government securities, and
  ordinary commercial bank deposits.
• The capital and financial account includes both
  private sector and official (central bank)
  transactions capital transactions,
  private-sector financial transactions and
  official settlements transactions.

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3.2 Capital and Financial Account -Capital
Transactions (????)
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3.2 Capital and Financial Account -
Private-Sector Financial Transactions

• Direct Investment any flow of lending to, or
  purchases of ownership in, a foreign enterprise
  that is largely owned and controlled by the
  entity (usually a multinational firm) doing this
  lending or investing.
• International portfolio investment investor does
  not own a large share of the enterprise being
  invested in, but is just investing as part of a
  diversified portfolio. (??????????????)
• Source from Pugel 14e

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3.2 Capital and Financial Account -
Official settlements transactions

• Official settlements transactions refer to the
  movement of financial assets among official
  holders (??????)

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3.2 Capital and Financial Account
-on the Balance-of-Payments

• Capital and financial transactions are
  recorded in the balance-of-payments statement by
  applying a plus sign (credit) to capital and
  financial inflows and a minus sign (debt) to
  capital and financial outflows.
• (????????,????????)
• Credit item -- capital and financial inflow
• (export of goods and services)Asset
  Liability
• Debit item - capital and financial outflows
  (imports of goods and services) Asset
  Liability

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??????????(?????)
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Exercise

• A 10-year loan of 1 Million is made to Romania.
  The loan is funded by creating a 1 million
  deposit for Romania in a U.S. bank
• A U.S. firm sells 1 million worth of wheat to
  Romania. The wheat is paid for with the bank
  account created in transaction 1
• A U.S. resident receives 10,000 in interest from
  German bonds she owned, the 10,000 is deposited
  in a German bank.
• A U.S tourist travels to Europe and spends the
  10,000 German deposit.
• The United States gives 100,000 worth of grain
  to Cambodia.
• (From Husted,
  2002)

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Exercises-Double entry bookkeeping application
on autonomous transactions
Balance of Payments Balance of Payments Balance of Payments Balance of Payments
Credit () Debit (-) Net Balance
Merchandise
Services
Income
Unilateral Transfers
Current Account
Short-term capital
Long-term capital
Totals

• 10,000 (4)
• 100,000(5)
• 10,000(3)
• 1,000,000 (2)
• 1,000,000 (1)
• 2,120,000

• 1,000,000 (2)
• 100,000 (5)
• 10,000 (3)
• 10,000(4)
• 1,000,000 (1)
• 2,120,000

• 1,000,000

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III. Balance-of-Payments Structure

• 3.1 Current Account
• 3.2 Capital and Financial Account
• 3.3 Statistical Discrepancy Errors and Omissions

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3.3 Statistical Discrepancy????(Errors and
Omissions)?????

• Data associated with a given transaction may
  come from different sources that differ in
  coverage, accuracy, and timing.
• This makes the balance of payments accounts
  seldom balance in practice.
• Account keepers force the two sides to balance by
  adding to the accounts a statistical discrepancy.
• It is very difficult to allocate this discrepancy
  among the current, capital, and financial
  accounts. (in reality though, statistical
  discrepancy is treated as part of the capital and
  financial account).

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IV. What can the balance of payments and its
sub-accounts tell us--Equilibrium of the balance
of payment

• 4.1 Macro meaning of the current account balance
• 4.2 The macro meaning of the overall balance
• 4.3 The International Investment Position
• 4.4 Economic implications of the
  balance-of-payments equilibrium

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4.1 Macro meaning of the current account balance

• A countrys current account balance equals the
  countrys net foreign investments (both private
  and official)
• CA If
• The countrys current account balance equals
  national saving that is not invested at home
• As S Id If, then CA S Id
• The countrys current account balance (which is
  approximately equal to the countrys net exports)
  is also (approximately) equal to difference
  between domestic product and national spending on
  goods and services
• CA Y E

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CA Y E

• WHY Current Account Balance (CA) equals Domestic
  production (Y) minus national expenditure (E)
• Y C Id G (X M)
• E C Id G, and CA (X M) approximately,
  so that
• CA Y E

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4.1 Macro meaning of the current account balance

• Current Account Balance equals
• --Net foreign investment (If)
• --the difference between national saving and
  domestic investments (S Id)
• --the difference between domestic product and
  national expenditure (Y E)
• The economic meaning of the current account
  balance (pp18, Pugel)

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Current account balances and goods and services
balances
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IV. What can the balance of payments and its
sub-accounts tell us--Equilibrium of the balance
of payment

• 4.1 Macro meaning of the current account balance
• 4.2 The macro meaning of the overall balance
• 4.3 The International Investment Position
• 4.4 Economic implications of the
  balance-of-payments equilibrium

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4.2 The macro meaning of the overall balance

• ??Net foreign investment (or borrowing) includes
  the balance on net private (or nonofficial)
  capital inflows (KA) and flows of official
  reserve assets (OR)
• If KA OR
• ??The official settlements balance (B)
  ??????measures the sum of the current account
  balance plus the private capital account balance
• B CA KA
• ??Any imbalance in the official settlements
  balance must be financed (or paid for) through
  official reserves flows
• B OR 0
• (???????????????????????????? )

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4.2 The macro meaning of the overall balance

• If the overall balance B is surplus, it equals
• --an accumulation of official reserve assets
  by the country
• --a decrease in foreign official reserve
  holdings of the countrys assets
• If the overall balance B is deficit, it equals
• --a decrease of official reserve assets by
  the country
• -- an accumulation in foreign official
  reserve
• It is the counterbalancing items the changes in
  official reserve holdings that shows the
  macroeconomic meaning of the official settlements
  balance.

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Iv. What can the balance of payments and its
sub-accounts tell us--Equilibrium of the balance
of payment

• 4.1 Macro meaning of the current account balance
• 4.2 The macro meaning of the overall balance
• 4.3 The International Investment Position
• 4.4 Economic implications of the
  balance-of-payments equilibrium

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4.3 The International Investment Position

• International investment position, a statement of
  the stocks of a nations international assets and
  foreign liabilities at a point in time
• (??????,?????????--?????,???????????????)
• CAIf the reflection of CA on International
  Investment Position
• The link between Current Account balance and the
  International Investment Position
• Lender or Borrower Current account
• (during a time period)
• Creditor or debtor net stock of foreign capital
  
• (at a point in time)

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???????

• ???????????????????(???)??????,?????????????
  ??????????????????????????????????????????????????
  ??????????????????????????????????????????????????
  ????????,??????????????????????????????

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????????????

• ???????????????????
• ???????????????????????????????
• ???????????????????????????
• ????????????????

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???????????????

• ???????????????(Balance of Payments,??BOP)??,?
  ??????????????????????????????????????????????????
  ??????????????????????????????????????????????????
  ????????????????????????????????????????????????,?
  ???????????????????,?????????????????????????????
  ,?????????????

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????????????

• ????????????,????????????????????????????????,????
  ????????????????,???????????????????,????????????
  ???
• ??????????????????????????????????????????????????
  ????????????????????????
• ??????,?????????????????????????,????????????,????
  ????????????

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4.3 The International Investment Position
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VI. What can the balance of payments and its
sub-accounts tell us--Equilibrium of the balance
of payment

• 4.1 Macro meaning of the current account balance
• 4.2 The macro meaning of the overall balance
• 4.3 The International Investment Position
• 4.4 Economic implications of the
  balance-of-payments equilibrium

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4.4 The economic implications of the
balance-of-payments equilibrium

• Balance-of-payments equilibrium is a
  condition where exports equal imports or credits
  equal debits on some particular sub-account, such
  as the current account or official settlements
  account.

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4.4 The economic implications of the
balance-of-payments equilibrium

• What you must understand
• Not all nations can have a trade surplus
• Deficits are not inherently bad, nor surpluses
  necessarily good
• The current account and the capital and financial
  account are not unrelated
• ????????0

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VI. What can the balance of payments and its
sub-accounts tell us--Equilibrium of the balance
of payment

• 4.1 Macro meaning of the current account balance
• 4.2 The macro meaning of the overall balance
• 4.3 The International Investment Position
• 4.4 Economic implications of the
  balance-of-payments equilibrium

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Summary

• The balance of payments is a record of a
  nations economic transactions with all other
  nations for a given year.
• A credit transaction vs. a debit transaction
• The structure of balance-of-payments includes (a)
  current account, (b) capital and financial
  account, and (c) statistical discrepancy
• --The balance on goods and services
• --The capital and financial account of the
  balance-of-payments
• --Current account deficits (surplus) are
  offset by capital account surplus (deficits)
• CA If S Id Y E
• B OR 0

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• 1. Assume the following is complete and accurate
  information about international transactions of
  the United States.
• Donald Trump buys a cottage in France for 1,008.
• American manufacturers export 998 in baseball
  bats.
• Profits from Costa Rican coffee plantations owned
  by residents of Seattle equal 1,002.
• Interest paid on a U.S. Treasury bond to a
  Japanese citizen is 1,004.
• An Irish worker in San Francisco sends 996 to
  her mother in Dublin.
• A German tourist spends 1,006 on a fling in Las
  Vegas.
• A Greek billionaire buys a hot dog stand in New
  York City for 1,006.
• Martha Stewart imports 1,002 of wine from
  France.
• a. Find the trade balance, the current account
  balance, and net private capital flows.
• b. Based on that information, was the Federal
  Reserve buying or selling foreign exchange? How
  much?