Copyright 2004, South-Western College PublishingInternational Economics By Robert J. Carbaugh 9th EditionChapter 11: The Balance of PaymentsThe Balance of PaymentsBalance of Paymentsw A record of international transactions between residents of one country and the rest of the world w International transactions include exchanges of goods, services or assets w “Residents” means businesses, individuals and government agencies, including citizens temporarily living abroad but excluding local subsidiaries of foreign corporations2Carbaugh, Chap. 11The Balance of PaymentsDouble-entry accounting in the BOPw All transactions are either debit or credit transactions w 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 residents3Carbaugh, Chap. 11The Balance of PaymentsDouble-entry accounting (contd)w 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 w Each credit transaction has a balancing debit transaction, and vice versa, so the overall balance of payments is always in balance4Carbaugh, Chap. 11Structure of the Balance of PaymentsCurrent accountw Goods and services balance Merchandise trade balance Services balance w Investment income (net) w Unilateral transfers Private transfer payments Governmental transfers5Carbaugh, Chap. 11Structure of the Balance of PaymentsCapital and financial accountw All purchases or sales of assets, including: Direct investment Securities (debt) Bank claims and liabilities Official settlements transactions6Carbaugh, Chap. 11Current accountCurrent account surplus and deficitw Current account and capital when one is in surplus the other must be in deficit w Current account surplus means exports of goods and services, investment income and transfers exceed imports and outflows w 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)7Carbaugh, Chap. 11US Balance of Payments, 2001 ($ bill.)Balance of PaymentsCurrent accountMerchandise trade exports$720.8 imports-1,147.4 Net-426.6 Services Travel & transport recpts.13.4 other services, net65.4 All services, net78.8 Balance on goods & services-347.8 Contd.8Carbaugh, Chap. 11US Balance of Payments, 2001 ($ bill.)Balance of PaymentsCurrent account (contd)Income receipts & payments investment income, net-13.7 employee compensation-5.4 All income, net-19.1Unilateral transfers, net-50.5Balance on current account$-417.49Carbaugh, Chap. 11US Balance of Payments, 2001 ($ bill.)Balance of PaymentsCapital & financial accountCapital account transactions, net0.7 Financial account transactions, net455.8 Statistical discrepancy-39.1 Balance on capital & financial account$417.410Carbaugh, Chap. 11US Balance of Payments 1970-2001Balance of Payments11Carbaugh, Chap. 11Balance of PaymentsCurrent account deficit a problem?w Current account deficit has little to do with foreign trade practices or competitiveness w Determined mostly by domestic macro- economic conditions that cause demand to exceed supply and increase imports (paid for with borrowing) w Whether a current account deficit is good or bad depends on whether the borrowed funds are used to pay for consumption or investment12Carbaugh, Chap. 11Balance of PaymentsBalance of international indebtednessw Summarizes one nations overall quantity of assets and liabilities against the rest of the world w Shows whether the nation is a net debtor or a net creditor w Indicates sensitive items, such as short term debt held by foreigners which could be liquidated quickly, straining finances13Carbaugh, Chap. 11