International Economics Tenth Edition

International Economics

Tenth Edition

Balance of PaymentsDominick Salvatore

John Wiley & Sons, Inc.

Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

CHAPTER T H I R T E E N

13

Introduction

The balance of payments provides a summary statement of international transactions for a nation for a specified period of time.

An international transaction is the exchange of a good, service or asset between residents of one nation and residents of another nation.

The main purpose of the balance of payments is to help the government in formulation monetary, fiscal and trade policies.Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.

The International Transactions of the United States


Accounting Balances and the Balance of Payments

Current Account All sales and purchases of currently

produced goods and services, investment incomes and unilateral transfers, providing link between international transactions and national income.

Current account surplus stimulates domestic production and income

Current account deficit dampens domestic production and income



Capital Account Includes debt forgiveness and goods

and financial assets that migrants take with them as they leave or enter the country.

The U.S. deficit in the current and capital accounts in 2007 are financed or covered by an equal net inflow of capital abroad.



Financial Account Shows the change in U.S.-owned assets

abroad and foreign-owned assets in the United States.

The U.S. covers its current and capital account deficits with an equal net financial account surplus.



If net private capital inflows do not cover the current and capital accounts deficit, the nation has a deficit in its balance of payments equal to the difference, which needs to be covered by a net credit balance on official (i.e., monetary authorities’) reserve transactions. Official settlements balance - The balance

on official reserve transactions, also called the balance of payments.

Official reserve account – The account in which official reserve transactions are entered.


Accounting Balances and the ex-ante Balance of Payments

Current account balance + capital account balance + (‘spontaneous’) financial

account balance (excluding official reserve transactions, but including net balance of financial derivatives)

+ statistical discrepancy ex-ante Balance of Payments


Ex-post BP is always ‘balanced’ or equal to zero. There is no meaning in analyzing it.

Ex-ante or spontaneous BP could be in balanced (=0), or imbalanced being in surplus (>0), or in deficit(<0).


Accounting Balances and the ex-post Balance of Payments

Deficit in the ex-ante balance of payments (negative sum of account balances) - covered ex-post by an equal amount official reserves transaction (reduction in international reserves of the nation or increase in foreign holdings of official assets of the nation).

Surplus in ex-ante the balance of payments (positive sum of account balances) – settled ex-post by an increase in the nation’s international reserves and/or reduction in foreign official holdings of nation’s assets.


The Postwar Balance of Payments of the United States

Points to keep in mind when examining balance of payments:1. Too much attention is usually placed on

balance of goods and short term data. Dangerous to extrapolate for year based

on quarterly data.



Points to keep in mind when examining balance of payments:2. International transactions are closely

interrelated rather than independent. For example, cutting U.S. foreign aid

programs also reduces ability of recipients to import U.S. goods, so improvement in U.S. balance of payments may be much less than reduction in aid.



Points to keep in mind when examining balance of payments:3. An attempt to reduce the U.S. trade

deficit with respect to a nation such as Japan is likely to reduce the U.S. surplus with respect to Brazil because Brazil pays for U.S. goods partly through natural resource exports to Japan.


The International Investment Position of the United States




A nation’s BOP measures international flow of goods, services and capital during a one- year period (flow concept).

A nation’s international investment position measures total amount and distribution of assets abroad and foreign assets in the nation at the end of the year (stock concept).



Also known as balance of international indebtedness.

Useful in projecting the future flow of income from U.S. foreign investments and payments on foreign investments in the U.S.

International Economics Tenth Edition

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