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Balance of Payments

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Title: Balance of Payments


1
Balance of Payments
  • Phil Bryson
  • Global Trade and Finance

2
Part IBalance of Payments Accounting
3
Balance of Payments Accounting
  • Records of transactions among nations have not
    always been kept. Are they very recent?

4
Balance of Payments Accounting
  • General use of BP accounting is more recent, but
    in 1381 Richard Aylesbury, an Englishman, had not
    only collected such statistics, but was
    developing analysis as to why the accounts
    behaved as the did.

5
Balance of Payments Accounting
  • It is not clear that they are really necessary!

6
Balance of Payments Accounting
  • For example, who keeps track of Californias
    balance of payments transactions with other US
    states?

7
Balance of Payments Accounting
  • What kind of records should be kept?
  • What do you want to find out?
  • The nature of the record changes by what we are
    trying to find out.

8
Balance of Payments Accounting
  • What kind of things do governments wish to know?
  • What is the international demand for our currency
    doing to its value?
  • Do we have enough currency reserves, or capacity
    to pay for our trade?
  • Does our trade promote full employment? And so on.

9
Balance of Payments Accounting
  • What kinds of transactions represent the basic
    focus of balance of payments accounting?
  • All transactions between the citizens of a nation
    and those of other nations are recorded in the
    balance of payments for a given period of time.

10
Recording International Payments
  • How is information recorded in balance of
    payments accounting?
  • The basic technique is standard, double-entry
    accounting,
  • a flow of funds statement that shows changes in
    assets, liabilities and net worth over time.

11
Recording International Payments
  • The balance of payments statement is to inform
    government authorities of the international
    position of the country to assist them with
    monetary-fiscal questions as well as trade and
    payments policies.

12
Debits, Credits, and International Payments
  • What is the meaning of a debit in a balance of
    payments account? What is a credit?
  • A debit records a transaction increasing assets
    or reducing liabilities.

13
Debits, Credits, and International Payments
  • A debit results from some kind of transaction
    requiring an immediate out-payment.
  • A debit arises from the purchase of goods,
    claims, or reserve assets and represents an
    inflow of value.

14
Debits, Credits, and International Payments
  • A credit records a transaction reducing assets or
    increasing liabilities.
  • It results from some kind of transaction
    requiring an immediate in-payment.
  • A credit arises from the sale of goods, claims,
    or reserve assets and represents an outflow of
    value.

15
Sources and Uses of Funds
  • How does a country derive foreign currencies it
    needs to conduct its international business?
  • The sources of funds, the supply of foreign
    exchange, are
  • exports,
  • investment income,

16
Sources and Uses of Funds
  • The sources of funds, the supply of foreign
    exchange, are
  • transfer payments received,
  • and long-term and short-term borrowing.

17
Sources and Uses of Funds
  • Credit entries reflect the sources, debit entries
    indicate the uses of foreign exchange.

18
Part IIThe Balance of Payments Accounts
19
BALANCE OF PAYMENTS ACCOUNTS
  • These accounts are to summarize payments a
    country receives from other nations and payments
    it must make to other nations.
  • They consist of the following five categories
  • 1. MERCHANDISE OR TRADE BALANCE
  • (Exports minus imports )

20
BALANCE OF PAYMENTS ACCOUNTS
  • 2. GOODS AND SERVICES BALANCE
  • (Just add services)
  • 3. NET UNILATERAL TRANSFERS
  • (Gifts)
  • U.S. government transfers to foreigners
  • (E.g., Foreign aid or wheat from U.S. stockpiles)
  • Private remittances of wages earned abroad, and
  • Lots of other transfers.

21
BALANCE OF PAYMENTS ACCOUNTS
  • To here, we are looking at the
  • CURRENT ACCOUNT BALANCE
  • (Net flows of goods, services and gifts).
  • Again
  • 1. MERCHANDISE OR TRADE BALANCE
  • 2. GOODS AND SERVICES BALANCE
  • 3. NET UNILATERAL TRANSFERS

22
Balance of Payments
  • There is also a set of asset flows referred to as
    the
  • CAPITAL ACCOUNT BALANCE
  • 4. NET CHANGES IN FOREIGN HOLDINGS OF U.S. ASSETS
  • Flows of financial assets and similar claims,
    or
  • Foreign direct and other investments in the
    U.S., or
  • Private capital flows.
  • (Note that we are talking direct and portfolio
    investments here).

23
Balance of Payments
  • 5. NET OFFICIAL INTERNATIONAL RESERVE
    TRANSACTION
  • Foreign official holdings of U.S. assets,
  • U.S. holdings of official reserve (gold and
    foreign exchange) assets
  • or, Official asset flows.

24
All Together Now
  • 1. MERCHANDISE OR TRADE BALANCE
  • 2. GOODS AND SERVICES BALANCE
  • 3. NET UNILATERAL TRANSFERS
  • 4. NET CHANGES IN FOREIGN HOLDINGS OF U.S.
    ASSETS
  • 5. NET OFFICIAL INTERNATIONAL RESERVE TRANSACTION

25
Balance of Payments
  • THE BALANCE OF PAYMENTS IS, THEREFORE, THE SUM OF
    THE CURRENT AND CAPITAL ACCOUNT BALANCES.

26
Services in the Balance of Payments
  • Note
  • Services include travel and tourism, trade
    transportation, insurance, education, financial,
    technical, telecommunications and other business
    and professional services.
  • In addition there are royalties, payments for
    capital services besides interest, such as
    dividends, payments for foreign labor, etc.

27
Overall Surpluses and Deficits
  • What is an overall balance of payments surplus?
    What is an overall deficit?
  • A surplus is when the sum of the current account
    plus the private capital account is
    counterbalanced by an accumulation of official
    net assets, so official reserve assets increase.

28
Overall Surpluses and Deficits
  • What is an overall balance of payments surplus?
    What is an overall deficit?
  • If it is in deficit , the sum is counterbalanced
    by an accumulation of official net liabilities,
    so the country sees its official reserve assets
    decline.

29
  • What Drives Large U.S. Current Account Deficits?
  • See Coughlin Pollard and the readings suggested
    in King, if interested. They are very short and
    reassuring.

30
  • The U.S. currently has a huge current account
    deficit.
  • Why do we have it?
  • Is it sustainable?

31
  • The current account balance is the difference
    between domestic saving and domestic investment.
    If domestic saving falls, the US must borrow from
    abroad to finance domestic investment
  • US foreign indebtedness is not necessarily bad if
    foreign funds are used towards investment. (p.
    231)

32
  • Repayment of the debt is potentially a problem if
    foreign funds are used to purchase consumption
    goods since future generations will bear the
    burden of debt.

33
  • Poole presents evidence that the rising current
    account deficit is associated with rising
    domestic investment, and a significant share of
    foreign investment in the US is equity investment
    which does not have to be repaid. He concludes
    that the US does not have a current account
    disorder. (p. 231)

34
  • Poole reminds us that a capital and financial
    account surplus is identical to a current
    account deficit because their dollar values are
    identical by the rules of accounting. (p. 236)

35
  • If a foreign firm builds a production facility in
    the US, the capital and financial account surplus
    increases, which, in turn, means that the U.S.
    current account deficit would increase. (p. 236)
  • The rising current account deficit in recent
    years has been accompanied by a rising rate of
    U.S. domestic investment. (p. 237)
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