÷
 

p e Balance
of Payments |
 
|  3
|  |
 
 

C apter Objective:

p is c apter serves to introduce t e student to t e

balance of payments. How it is constructed and ow
balance of payments data may be interpreted.
EUN / RESNICK
Second Edition
 C apter p ree Outline
[ Balance of Payments Accounting
[ Balance of Payments Accounts
p e Current Account
p e Capital Account
Statistical Discrepancy
Official Reserves Account
[ p e Balance of Payments Identity
[ Balance of Payments prends in Major
Countries
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 Balance of Payments Accounting
[ p e Balance of Payments is t e statistical record
of a country¶s international transactions over a
certain period of time presented in t e form of
double-entry bookkeeping.

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.

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 Balance of Payments Example
[ Suppose t at Maplewood Bicycle in
Maplewood Missouri, USA imports
$100,000 wort of bicycle frames from
Mercian Bicycles in Darby England.
[ p ere will exist a $100,000 credit recorded
by Mercian t at offsets a $100,000 debit at
Maplewood¶s bank account.
[ p is will lead to a rise in t e supply of
dollars and t e demand for Britis pounds.

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 Balance of Payments Accounts
[ p e balance of payments accounts are t ose t at
record all transactions between t e residents of a
country and residents of all foreign nations.
[ p ey are composed of t e following:
p e Current Account
p e Capital Account
Statistical Discrepancy
p e Official Reserves Account

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 p e Current Account
[ Includes all imports and exports of goods and
services.
[ Includes unilateral transfers of foreign aid.
[ If t e debits exceed t e credits, t en a country is
running a .

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 p e Capital Account
[ p e capital account measures t e difference
between U.S. sales of assets to foreigners and U.S.
purc ases of foreign assets.
[ p e U.S. enjoys about a $150,000,000,000 capital
account surplus²absent of U.S. borrowing from
foreigners, t is ³finances´ our trade deficit.
[ p e capital account is composed of Foreign Direct
Investment (FDI), portfolio investments and ot er
investments.
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 Statistical Discrepancy
[ p ere¶s going to be some omissions and
misrecorded transactions²so we use a ³plug´
figure to get t ings to balance.
[ Ex ibit 3.1 s ows a discrepancy of $96.76 billion
in 1997.

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 p e Official Reserves Account
[ Official reserves assets include gold, foreign
currencies, SDRs, reserve positions in t e IMF.

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 p e Balance of Payments Identity
BCA + BKA + BRA = 0
w ere
BCA = balance on current account
BKA = balance on capital account
BRA = balance on t e reserves account

Under a pure flexible exc ange rate regime,

BCA + BKA = 0
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 U.S. Balance of Payments Data
  

1 Exports $1,167.61
2 Imports ($1,295.53)
3 Unilateral pransfers $6.13 ($45.01)
 ($166.80)

4 Direct Investment $107.93 ($119.44)
5 Portfolio Investment $387.62 ($79.28)
6 Ot er Investments $194.95 ($227.2)
 $264.58
7 Statistical Discrepancies ($96.76)
 $1.02
 ($1.02)

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 U.S. Balance of Payments Data
  
 In 1997, t e
1 Exports $1,167.61
U.S. imported
2 Imports ($1,295.53)
3 Unilateral pransfers $6.13 ($45.01)
more t an it
 ($166.80) exported, t us

running a
4 Direct Investment $107.93 ($119.44)
5 Portfolio Investment $387.62 ($79.28) current account
6 Ot er Investments

$194.95 ($227.2) deficit of
$264.58
7 Statistical Discrepancies ($96.76) $166.8 billion.
 $1.02
 ($1.02)

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 U.S. Balance of Payments Data
   During t e same

year, t e U.S.
1 Exports $1,167.61
2 Imports ($1,295.53)
attracted net
3 Unilateral pransfers $6.13 ($45.01) investment of
 ($166.80) $264.58

4 Direct Investment $107.93 ($119.44)
billion²clearly
5 Portfolio Investment $387.62 ($79.28) t e rest of t e
6 Ot er Investments $194.95 ($227.2)
 $264.58
world found t e
7 Statistical Discrepancies ($96.76) U.S. to be a
 $1.02
 ($1.02)
good place to
invest.
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 U.S. Balance of Payments Data
  

1 Exports $1,167.61
Under a pure
2 Imports ($1,295.53)
flexible
3 Unilateral pransfers $6.13 ($45.01) exc ange rate
 ($166.80) regime, t ese

4 Direct Investment $107.93 ($119.44) numbers would
5 Portfolio Investment $387.62 ($79.28) balance eac
6 Ot er Investments $194.95 ($227.2)
 $264.58
ot er out.
7 Statistical Discrepancies ($96.76)
 $1.02
 ($1.02)

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 U.S. Balance of Payments Data
  

1 Exports $1,167.61
In t e real
2 Imports ($1,295.53)
world, t ere
3 Unilateral pransfers $6.13 ($45.01) is a statistical
 ($166.80) discrepancy.

4 Direct Investment $107.93 ($119.44)
5 Portfolio Investment $387.62 ($79.28)
6 Ot er Investments $194.95 ($227.2)
 $264.58
7 Statistical Discrepancies ($96.76)
 $1.02
 ($1.02)

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 U.S. Balance of Payments Data
  

1 Exports $1,167.61
Including t at,
2 Imports ($1,295.53)
t e balance of
3 Unilateral pransfers $6.13 ($45.01) payments identity
 ($166.80) s ould old:

4 Direct Investment $107.93 ($119.44) BCA + BKA = - BRA
5 Portfolio Investment $387.62 ($79.28)
6 Ot er Investments $194.95 ($227.2)
 $264.58
7 Statistical Discrepancies ($96.76)
 $1.02
 ($1.02)
($166.80) + $264.58 + ($96.76) = $1.02= ±($1.02)
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 Balance of Payments and t e
Exc ange Rate
  

1 Exports $1,167.61

2 Imports ($1,295.53)
3 Unilateral pransfers $6.13 ($45.01)
 ($166.80)

4 Direct Investment $107.93 ($119.44)
5 Portfolio Investment $387.62 ($79.28)
6 Ot er Investments $194.95 ($227.2) 
 $264.58
7 Statistical Discrepancies ($96.76)
 $1.02 M
 ($1.02) Exc ange rate $
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 Balance of Payments and t e
Exc ange Rate
  

1 Exports $1,167.61

2 Imports ($1,295.53)
3 Unilateral pransfers $6.13 ($45.01)
 ($166.80)

4 Direct Investment $107.93 ($119.44)
5 Portfolio Investment $387.62 ($79.28)
6 Ot er Investments $194.95 ($227.2) 
 $264.58
7 Statistical Discrepancies ($96.76)
 $1.02 M
 ($1.02) Exc ange rate $
As U.S. citizens import, t ey are supply dollars to t e FOREX market.
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 Balance of Payments and t e
Exc ange Rate
  

1 Exports $1,167.61

2 Imports ($1,295.53)
3 Unilateral pransfers $6.13 ($45.01)
 ($166.80)

4 Direct Investment $107.93 ($119.44)
5 Portfolio Investment $387.62 ($79.28)
6 Ot er Investments $194.95 ($227.2) 
 $264.58
7 Statistical Discrepancies ($96.76)
 $1.02 M
 ($1.02) Exc ange rate $
As U.S. citizens export, ot ers demand dollars at t e FOREX market.
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 Balance of Payments and t e
Exc ange Rate
  

1 Exports $1,167.61


2 Imports ($1,295.53)


3 Unilateral pransfers $6.13 ($45.01)

 ($166.80)

4 Direct Investment $107.93 ($119.44)
5 Portfolio Investment $387.62 ($79.28)
6 Ot er Investments $194.95 ($227.2) 
 $264.58
7 Statistical Discrepancies ($96.76)
 $1.02 M
 ($1.02) Exc ange rate $
As t e U.S. government sells dollars, t e supply of dollars increases.
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 Balance of Payments prends
[ Since 1982 t e U.S. as experienced continuous
deficits on t e current account and continuous
surpluses on t e capital account.
[ During t e same period, Japan as experienced t e
opposite.

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 Balance of Payments prends

U.S. Balance of Payments Trends

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Õapan's Balance of Payments Trend



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[ ermany traditionally ad current account
surpluses.
[ Since 1991 ermany as been experiencing
current account deficits.
[ p is is largely due to erman reunification and
t e resultant need to absorb more output
domestically to rebuild t e former East ermany.
[ W at matters is t e nature and causes of t e
disequilibrium.
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