B. Balance of Payments
- Record of economic transactions between the residents
of one country and the rest of the world
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1. Double entry accounting
- Credit transaction - receipt of payment
from foreigners
- Debit transaction - payment to foreigners
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a. Credits
- Transportation and travel receipts
- Income received from investments abroad
- Gifts received from foreign residents
- Aid received from foreign governments
- Investments in the United States by overseas
residents
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b. Debits
- Transportation and travel expenditures
- Income paid on investments of foreigners
- Gifts to foreign residents
- Aid given by the U.S. government
- Overseas investment by U.S. residents
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2. Balance-of-payments structure
a. Current account
- Measures flows of goods, services,
investment income, and unilateral transfers
(1) Merchandise trade balance
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(2) Goods and services balance
- Merchandise trade balance plus trade in
services
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(3) Unilateral transfers
- Private and public transfers between U.S.
and the rest of the world
Ex. - Gifts, remittances by foreign
workers
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b. Capital and financial account
- Measures international purchases of real and
financial assets
(1) Capital transactions
- Debt forgiveness, migrants' assets,
rights to natural resources, patents, copyrights, trademarks,
franchises and leases
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(2) Financial transactions
- Direct investment - stock ownership of at
least 10 percent in a business in another country
- Securities - stocks and bonds (public or
private)
- Bank claims - loans, overseas deposits,
acceptances, foreign commercial paper, foreign government
obligations, claims on affiliated banks abroad
- Bank liabilities - demand deposits,
negotiable orders of withdrawal, savings deposits, certificates
of deposit, liabilities to affiliated banks abroad
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(3) Official settlement transactions
- Official reserve assets - gold
reserves, convertible securities (yen, euro), special drawing
rights, reserve positions in the International Monetary Fund (IMF)
- Also liabilities to foreign official
agencies
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c. Statistical discrepancy
- Residual to balance debits and credits
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3. Current account deficits and surpluses
- Current account and capital and financial account
must balance
- Current account surplus => capital and financial
account deficit
- Current account deficit => capital and financial
account surplus
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a. National income accounting
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b. Impact of financial flows
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c. Business cycles and economic growth
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d. Is a current account deficit a problem?
- Positive if funds used for investment,
negative if used for consumption
- Okay if foreign savings flow in to finance
deficit, could be a problem if funds pulled out
- Possible glut of savings worldwide, most
going to U.S.
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4. Balance of international indebtedness
- Net creditor - claims on foreigners >
foreigners' claims
- Net debtor - claims on foreigners <
foreigners' claims
- Short-term liabilities held by foreigners,
balance of official monetary holdings significant
- U.S. a net debtor because U.S. attractive to
investors
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