The document discusses the balance of payments of countries. It provides details on the key components of the balance of payments including the current account, capital account, and official reserves account. It then presents balance of payments data for the United States in 2000 which showed a current account deficit but a capital account surplus, bringing the overall balance to zero. Similar trends over time are shown for other major countries like Japan, Germany, and the UK.

1. INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Third Edition Chapter Objective: This chapter serves to introduce the student to the balance of payments. How it is constructed and how balance of payments data may be interpreted. 3 Chapter Three The Balance of Payments

11. U.S. Balance of Payments Data Credits Debits Current Account 1 Exports $1,418.64 2 Imports ($1,809.18) 3 Unilateral Transfers $10.24 ($64.39) Balance on Current Account ($444.69) Capital Account 4 Direct Investment $287.68 ($152.44) 5 Portfolio Investment $474.39 ($124.94) 6 Other Investments $262.64 ($303.27) Balance on Capital Account $444.26 7 Statistical Discrepancies Overall Balance $0.30 Official Reserve Account ($0.30) 0.73

12. U.S. Balance of Payments Data In 2000, the U.S. imported more than it exported, thus running a current account deficit of $444.69 billion. Credits Debits Current Account 1 Exports $1,418.64 2 Imports ($1,809.18) 3 Unilateral Transfers $10.24 ($64.39) Balance on Current Account ($444.69) Capital Account 4 Direct Investment $287.68 ($152.44) 5 Portfolio Investment $474.39 ($124.94) 6 Other Investments $262.64 ($303.27) Balance on Capital Account $444.26 7 Statistical Discrepancies Overall Balance $0.30 Official Reserve Account ($0.30) 0.73

13. U.S. Balance of Payments Data During the same year, the U.S. attracted net investment of $444.26 billion—clearly the rest of the world found the U.S. to be a good place to invest. Credits Debits Current Account 1 Exports $1,418.64 2 Imports ($1,809.18) 3 Unilateral Transfers $10.24 ($64.39) Balance on Current Account ($444.69) Capital Account 4 Direct Investment $287.68 ($152.44) 5 Portfolio Investment $474.39 ($124.94) 6 Other Investments $262.64 ($303.27) Balance on Capital Account $444.26 7 Statistical Discrepancies Overall Balance $0.30 Official Reserve Account ($0.30) 0.73

14. U.S. Balance of Payments Data Under a pure flexible exchange rate regime, these numbers would balance each other out. Credits Debits Current Account 1 Exports $1,418.64 2 Imports ($1,809.18) 3 Unilateral Transfers $10.24 ($64.39) Balance on Current Account ($444.69) Capital Account 4 Direct Investment $287.68 ($152.44) 5 Portfolio Investment $474.39 ($124.94) 6 Other Investments $262.64 ($303.27) Balance on Capital Account $444.26 7 Statistical Discrepancies Overall Balance $0.30 Official Reserve Account ($0.30) 0.73

15. U.S. Balance of Payments Data In the real world, there is a statistical discrepancy. Credits Debits Current Account 1 Exports $1,418.64 2 Imports ($1,809.18) 3 Unilateral Transfers $10.24 ($64.39) Balance on Current Account ($444.69) Capital Account 4 Direct Investment $287.68 ($152.44) 5 Portfolio Investment $474.39 ($124.94) 6 Other Investments $262.64 ($303.27) Balance on Capital Account $444.26 7 Statistical Discrepancies Overall Balance $0.30 Official Reserve Account ($0.30) 0.73

16. U.S. Balance of Payments Data Including that, the balance of payments identity should hold: BCA + BKA = – BRA ($444.69) + $444.26 + $0.73 = $0.30 = – ($0.30) Credits Debits Current Account 1 Exports $1,418.64 2 Imports ($1,809.18) 3 Unilateral Transfers $10.24 ($64.39) Balance on Current Account ($444.69) Capital Account 4 Direct Investment $287.68 ($152.44) 5 Portfolio Investment $474.39 ($124.94) 6 Other Investments $262.64 ($303.27) Balance on Capital Account $444.26 7 Statistical Discrepancies Overall Balance $0.30 Official Reserve Account ($0.30) 0.73

17. Balance of Payments and the Exchange Rate Q P Exchange rate $ S D Credits Debits Current Account 1 Exports $1,418.64 2 Imports ($1,809.18) 3 Unilateral Transfers $10.24 ($64.39) Balance on Current Account ($444.69) Capital Account 4 Direct Investment $287.68 ($152.44) 5 Portfolio Investment $474.39 ($124.94) 6 Other Investments $262.64 ($303.27) Balance on Capital Account $444.26 7 Statistical Discrepancies Overall Balance $0.30 Official Reserve Account ($0.30) 0.73

18. Balance of Payments and the Exchange Rate Q P As U.S. citizens import, they are supply dollars to the FOREX market. Exchange rate $ S D Credits Debits Current Account 1 Exports $1,418.64 2 Imports ($1,809.18) 3 Unilateral Transfers $10.24 ($64.39) Balance on Current Account ($444.69) Capital Account 4 Direct Investment $287.68 ($152.44) 5 Portfolio Investment $474.39 ($124.94) 6 Other Investments $262.64 ($303.27) Balance on Capital Account $444.26 7 Statistical Discrepancies Overall Balance $0.30 Official Reserve Account ($0.30) 0.73

19. Balance of Payments and the Exchange Rate Q P As U.S. citizens export, others demand dollars at the FOREX market. Exchange rate $ S D Credits Debits Current Account 1 Exports $1,418.64 2 Imports ($1,809.18) 3 Unilateral Transfers $10.24 ($64.39) Balance on Current Account ($444.69) Capital Account 4 Direct Investment $287.68 ($152.44) 5 Portfolio Investment $474.39 ($124.94) 6 Other Investments $262.64 ($303.27) Balance on Capital Account $444.26 7 Statistical Discrepancies Overall Balance $0.30 Official Reserve Account ($0.30) 0.73

20. Balance of Payments and the Exchange Rate Q P S D As the U.S. government sells dollars, the supply of dollars increases. S 1 Exchange rate $ Credits Debits Current Account 1 Exports $1,418.64 2 Imports ($1,809.18) 3 Unilateral Transfers $10.24 ($64.39) Balance on Current Account ($444.69) Capital Account 4 Direct Investment $287.68 ($152.44) 5 Portfolio Investment $474.39 ($124.94) 6 Other Investments $262.64 ($303.27) Balance on Capital Account $444.26 7 Statistical Discrepancies Overall Balance $0.30 Official Reserve Account ($0.30) 0.73

22. Balances on the Current (BCA) and Capital (BKA) Accounts of the United States Source: IMF International Financial Statistics Yearbook, 2000

23. Balances on the Current (BCA) and Capital (BKA) Accounts of United Kingdom Source: IMF International Financial Statistics Yearbook, 2000

24. Balances on the Current (BCA) and Capital (BKA) Accounts of Japan Source: IMF International Financial Statistics Yearbook, 2000

25. Balances on the Current (BCA) and Capital (BKA) Accounts of Germany Source: IMF International Financial Statistics Yearbook, 2000

26. Balances on the Current (BCA) and Capital (BKA) Accounts of China Source: IMF International Financial Statistics Yearbook, 2000

28. Balances on the Current (BCA) and Capital (BKA) Accounts of Five Major Countries Source: IMF International Financial Statistics Yearbook, 2000

29. End Chapter Three