BALANCE OF

PAYMENTS
Chapter 10

BALANCE
OF
o definition record of exchange of goods,
services or assets between businesses,
PAYMENTS
individuals, and governments of one country

with the rest of the world

o credit receipt of payment from foreign source

merchandise exports
transportation & travel receipts
gifts from foreign residents
investment in U.S. by foreign residents

o debit payment to foreign source

merchandise imports
transportation & travel expenditures
gifts to foreign residents
foreign investment by U.S. residents
aid given by U.S. government

CURRENT ACCOUNT

o definition monetary value of transactions in

goods, services, income flows and unilateral
transfers
o merchandise trade balance includes all goods
that U.S. exports or imports
o surplus (positive balance) implies exports > imports
o deficit (negative balance) implies imports > exports

o goods and services balance services added

to merchandise trade balance
o unilateral transfers gifts of goods & services
or financial assets between the U.S. and the
rest of the world

CAPITAL AND FINANCIAL

oACCOUNT
definition international purchases & sales of
real estate, stocks & bonds, government
securities and commercial bank deposits
o examples:

direct investment residents of one country acquire

10% or more of business in another country
securities private sector purchases
bank claims loans, overseas deposits,
acceptances, foreign commercial paper
bank liabilities demand deposits, NOW accounts,
savings deposits, CDs

o official settlements transactions movement

of financial assets among official holders
such as the Fed and Bank of England

OFFICIAL RESERVE
purposes:
ASSETS
o international liquidity to finance short run trade
deficits and weather periodic currency crises
o provide ability to buy or sell reserve assets in
private
markets in
order to
stabilize
exchange
rates

U.S. BALANCE OF PAYMENTS (amounts in billions)

2008

U.S. BALANCE OF PAYMENTS: 19802008

(amounts in billions)

o trade deficits can decrease value of dollar

decreasing U.S. purchasing power abroad
o trade deficits can also decrease employment in
domestic industries but are offset by capital inflows
generating employment in other industries

NET FOREIGN INVESTMENT AND

THE CURRENT ACCOUNT
o
current account surplus => excess of exports
BALANCE
over imports => net supplier of funds =>
improves net foreign investment position
o current account deficit => excess of imports over
exports => net demander of funds => decline in
net foreign investment position
o net borrowing:
(G

T) + (I

S) = Current Account
Government Private Private
Deficit
Deficit
Investment Saving
(net borrowing)

IS CURRENT ACCOUNT DEFICIT

oA APROBLEM?
current account deficit has little to do with
inherent inability of a country to sell goods in
world market.
o Rather, such a deficit indicates imports were
needed to meet the domestic demand for
goods and services.
o Current account deficits are not reversed by
trade policies that attempt to alter the levels of
import or exports.
o Resulting debt is less problematic if funds are
used for investment spending rather than
consumption spending.

CURRENT ACCOUNT &

o
short run: recession
=> current account surplus
ECONOMIC
GROWTH

savings falls but investment falls to a greater degree

imports tend to fall with the decrease in overall
demand

o long run: rapid

economic
growth leads to
current account
deficits because
of investment
financed via
foreign saving

CONTINUOUS CURRENT
o no economic reason why current account deficit
ACCOUNT
DEFICIT?
cannot continue indefinitely
o deficits from 1820-1875 as other nations
invested in the U.S.
o dependent on foreign willingness to invest in the
U.S.
o current account
could be
decreased
through foreign
growth and
increased
national savings

GLOBAL SAVINGS GLUT?

o excess global savings allowed U.S. borrowing

corporate profits in Japan

savings greater than investment in China
oil profits in the Middle East and Russia

o surge in savings lowered interest rates which

lead to investments that were unproductive
and reduction of Feds control of economy
o U.S. absorbed an estimated 75% of excess
world savings in 2006
o concern: reduction in such investment in the
U.S. will cause significant depreciation in the
dollar and a substantial increase in interest
rates

U.S.
AS
DEBTOR
o net creditor U.S. claims on foreigners exceed
foreign claims on U.S.
NATION
o net debtor foreign claims on U.S. exceed U.S.
claims on foreigners

o reasons U.S. is net debtor: foreign investors

placed more funds in the U.S. because of