INTERNATIONAL ECONOMICS

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

• Merchandise exports

• 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

• Merchandise imports

• 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

• Exports - imports

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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

• Involves central bank(s)

• 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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• U.S. balance of payments

 

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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