This slide explain about The balance of payments.

1. International Economics
By Robert J. Carbaugh
8th Edition
Chapter 11:
The Balance of Payments

2. The Balance of Payments
Balance of Payments
• A record of international transactions between
residents of one country and the rest of the
world
• International transactions include exchanges of
goods, services or assets
• “Residents” means businesses, individuals and
government agencies, including citizens
temporarily living abroad but excluding local
subsidiaries of foreign corporations

3. The Balance of Payments
Double-entry accounting in the
BOP
• All transactions are either debit or credit
transactions
• 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 residents

4. The Balance of Payments
Double-entry accounting (cont’d)
• 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
• Each credit transaction has a balancing debit
transaction, and vice versa, so the overall balance
of payments is always in balance

5. Structure of the Balance of Payments
Current account
• Goods and services balance
– Merchandise trade balance
– Services balance
• Investment income (net)
• Unilateral transfers
– Private transfer payments
– Governmental transfers

6. Structure of the Balance of Payments
Capital account
• All purchases or sales of assets, including:
– Direct investment
– Securities (debt)
– Bank claims and liabilities
– Official settlements transactions

7. Current account
Current account surplus and
deficit
• Current account and capital account balance
each other; when one is in surplus the other must
be in deficit
• Current account surplus means exports of goods
and services, investment income and transfers
exceed imports and outflows
• 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)

8. US Balance of Payments, 1999 ($
bill.)
Balance of Payments
Current account
Merchandise trade
exports $683.0
imports -1,030.1
Net -347.1
Services
Travel & transport recpts. 5.3
other services, net 74.3
All services, net 79.6
Balance on goods & services -267.5
Cont’d.

9. US Balance of Payments, 1999 ($
bill.)
Balance of Payments
Current account (cont’d)
Income receipts & payments
investment income, net -19.1
employee compensation -5.7
All income, net -24.8
Unilateral transfers, net -46.6
Balance on current account $-338.9

10. US Balance of Payments, 1999 ($
bill.)
Balance of Payments
Capital account
Changes in US assets abroad, net
US official reserve assets $8.7
other US govt assets -0.4
US private assets -381.0
All changes, net -327.7
Changes in foreign assets in the US, net
foreign official assets 44.6
foreign private assets 706.2
All changes, net 750.8
Allocation of SDRs 0
Statistical discrepancy -39.2
Balance on capital account $338.9

11. US Balance of Payments 1970-99
Balance of Payments

12. Balance of Payments
Current account deficit a
problem?
• Current account deficit has little to do with
foreign trade practices or competitiveness
• Determined mostly by domestic macro-
economic conditions that cause demand to
exceed supply and increase imports (paid for
with borrowing)
• Whether a current account deficit is good or
bad depends on whether the borrowed funds
are used to pay for consumption or investment

13. Balance of Payments
Balance of international
indebtedness
• Summarizes one nation’s overall quantity of
assets and liabilities against the rest of the
world
• Shows whether the nation is a net debtor or
a net creditor
• Indicates sensitive items, such as short term
debt held by foreigners which could be
liquidated quickly, straining finances