Balance Of Payment
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BALANCE OF PAYMENT
3-1
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
Balance of Payments Accounts The balance of payments accounts are those that record all transactions between the residents of a country and residents of all foreign nations. They are composed of the following:
3-2
The Current Account The Capital Account The Official Reserves Account Statistical Discrepancy
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
The Current Account Includes all imports and exports of goods and services. Includes unilateral transfers of foreign aid. If the debits exceed the credits, then a country is running a trade deficit. If the credits exceed the debits, then a country is running a trade surplus.
3-3
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
The Capital Account The capital account measures the difference between sales of assets to foreigners and purchases of foreign assets. The capital account is composed of Foreign Direct Investment (FDI), portfolio investments and other investments.
3-4
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
Statistical Discrepancy
There’s going to be some omissions and misrecorded transactions—so we use a “plug” figure to get things to balance.
3-5
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
The Official Reserves Account
Official reserves assets include gold, foreign currencies, SDRs, reserve positions in the IMF.
3-6
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
The Balance of Payments Identity BCA + BKA + BRA = 0 where BCA = balance on current account BKA = balance on capital account BRA = balance on the reserves account Under a pure flexible exchange rate regime, BCA + BKA = 0 3-7
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
U.S. Balance of Payments Data Credits
Debits
Current Account 1
Exports
2
Imports
$1,418.64 ($1,809.18)
3
Unilateral Transfers Balance on Current Account Capital Account 4 5 6
Direct Investment Portfolio Investment Other Investments Balance on Capital Account
7
Statistical Discrepancies Overall Balance Official Reserve Account 3-8
$10.24
($64.39) ($444.69)
$287.68 $474.39 $262.64 $444.26 0.73 $0.30
($152.44) ($124.94) ($303.27)
($0.30)
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
U.S. Balance of Payments Data Credits
Debits
Current Account 1
Exports
2
Imports
$1,418.64 ($1,809.18)
3
Unilateral Transfers Balance on Current Account Capital Account 4 5 6
Direct Investment Portfolio Investment Other Investments Balance on Capital Account
7
Statistical Discrepancies Overall Balance Official Reserve Account 3-9
$10.24
($64.39) ($444.69)
$287.68 $474.39 $262.64 $444.26 0.73 $0.30
($152.44) ($124.94) ($303.27)
In 2000, the U.S. imported more than it exported, thus running a current account deficit of $444.69 billion.
($0.30)
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
U.S. Balance of Payments Data Credits
Debits
Current Account 1
Exports
2
Imports
$1,418.64 ($1,809.18)
3
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7
Direct Investment Portfolio Investment Other Investments Balance on Capital Account
Statistical Discrepancies Overall Balance Official Reserve Account 3-
$10.24
($64.39) ($444.69)
$287.68 $474.39 $262.64 $444.26 0.73 $0.30
($152.44) ($124.94) ($303.27)
($0.30)
During the same year, the U.S. attracted net investment of $444.26 billion —clearly the rest of the world found the U.S. to be a good place to invest.
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
U.S. Balance of Payments Data Credits
Debits
Current Account 1
Exports
2
Imports
$1,418.64 ($1,809.18)
3
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7
Direct Investment Portfolio Investment Other Investments Balance on Capital Account
Statistical Discrepancies Overall Balance Official Reserve Account 3-
$10.24
($64.39) ($444.69)
$287.68 $474.39 $262.64 $444.26 0.73 $0.30
($152.44) ($124.94) ($303.27)
Under a pure flexible exchange rate regime, these numbers would balance each other out.
($0.30)
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
U.S. Balance of Payments Data Credits
Debits
Current Account 1
Exports
2
Imports
$1,418.64 ($1,809.18)
3
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7
Direct Investment Portfolio Investment Other Investments Balance on Capital Account
Statistical Discrepancies Overall Balance Official Reserve Account 3-
$10.24
($64.39) ($444.69)
$287.68 $474.39 $262.64 $444.26 0.73 $0.30
($152.44) ($124.94) ($303.27)
In the real world, there is a statistical discrepancy.
($0.30)
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
U.S. Balance of Payments Data Credits
Debits
Current Account 1
Exports
2
Imports
$1,418.64 ($1,809.18)
3
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7
Direct Investment Portfolio Investment Other Investments Balance on Capital Account
Statistical Discrepancies Overall Balance Official Reserve Account
$10.24
($64.39) ($444.69)
$287.68 $474.39 $262.64 $444.26 0.73 $0.30
($152.44) ($124.94) ($303.27)
Including that, the balance of payments identity should hold: BCA + BKA = – BRA
($0.30)
($444.69) + $444.26 + $0.73 = $0.30= –($0.30) 3-
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
Balance of Payments and the Exchange Rate Credits
Debits
Current Account 1
Exports
2
Imports
Direct Investment Portfolio Investment Other Investments Balance on Capital Account
Statistical Discrepancies Overall Balance Official Reserve Account 3-
S
($1,809.18)
Unilateral Transfers Balance on Current Account Capital Account
7
P
$1,418.64
3
4 5 6
Exchange rate $
$10.24
($64.39) ($444.69)
$287.68 $474.39 $262.64 $444.26 0.73 $0.30
($152.44) ($124.94) ($303.27)
D Q
($0.30)
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
Balance of Payments and the Exchange Rate Credits
Debits
Current Account 1
Exports
2
Imports
S
($1,809.18)
Unilateral Transfers Balance on Current Account Capital Account Direct Investment Portfolio Investment Other Investments Balance on Capital Account
7
P
$1,418.64
3
4 5 6
Exchange rate $
Statistical Discrepancies Overall Balance Official Reserve Account
$10.24
($64.39) ($444.69)
$287.68 $474.39 $262.64 $444.26 0.73 $0.30
($152.44) ($124.94) ($303.27)
D Q
($0.30)
As U.S. citizens import, they are supply dollars to the FOREX market. 3-
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
Balance of Payments and the Exchange Rate Credits
Debits
Current Account 1
Exports
2
Imports
S
($1,809.18)
Unilateral Transfers Balance on Current Account Capital Account
7
P
$1,418.64
3
4 5 6
Exchange rate $
Direct Investment Portfolio Investment Other Investments Balance on Capital Account
Statistical Discrepancies Overall Balance Official Reserve Account
$10.24
($64.39) ($444.69)
$287.68 $474.39 $262.64 $444.26 0.73 $0.30
($152.44) ($124.94) ($303.27)
D Q
($0.30)
As U.S. citizens export, others demand dollars at the FOREX market. 3-
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
Balance of Payments and the Exchange Rate Credits
Debits
Current Account 1
Exports
2
Imports
($1,809.18)
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7
P
$1,418.64
3
Direct Investment Portfolio Investment Other Investments Balance on Capital Account
Statistical Discrepancies Overall Balance Official Reserve Account
Exchange rate $
$10.24
($64.39) ($444.69)
$287.68 $474.39 $262.64 $444.26 0.73 $0.30
($152.44) ($124.94) ($303.27)
S
S1
D Q
($0.30)
As the U.S. government sells dollars, the supply of dollars increases. 3-
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
Balance of Payments Trends Since 1982 the U.S. has experienced continuous deficits on the current account and continuous surpluses on the capital account. During the same period, Japan has experienced the opposite.
3-
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
Balances on the Current (BCA) and Capital (BKA) Accounts of the United States 500 400 300 200 100 0 -1001982 1984 1986 1988 1990 1992 1994 1996 1998 2000
U.S. BCA U.S. BKA
-200 -300 -400 -500
Source: IMF International Financial Statistics Yearbook, 2000 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res 3-
Balances on the Current (BCA) and Capital (BKA) Accounts of United Kingdom 40 30 20 10 0 -101982
UK BCA 1984
1986
1988
1990
1992
1994
1996
1998
2000
UK BKA
-20 -30 -40 -50
Source: IMF International Financial Statistics Yearbook, 2000 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res 3-
Balances on the Current (BCA) and Capital (BKA) Accounts of Japan 150 100 50 0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 -50
Japan BCA Japan BKA
-100 -150
Source: IMF International Financial Statistics Yearbook, 2000 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res 3-
Balances on the Current (BCA) and Capital (BKA) Accounts of Germany 80 60 40 20 0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 -20
Germany BCA Germany BKA
-40 -60 -80
Source: IMF International Financial Statistics Yearbook, 2000 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res 3-
Balances on the Current (BCA) and Capital (BKA) Accounts of China 35 30 25 20 15 10 5
China BCA China BKA
0 -51982 1984 1986 1988 1990 1992 1994 1996 1998 2000 -10 -15
Source: IMF International Financial Statistics Yearbook, 2000 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res 3-
Balance of Payments Trends Germany traditionally had current account surpluses. Since 1991 Germany has been experiencing current account deficits. This is largely due to German reunification and the resultant need to absorb more output domestically to rebuild the former East Germany. What matters is the nature and causes of the disequilibrium.
3-
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
Balances on the Current (BCA) and Capital (BKA) Accounts of Five Major Countries 500
C h in a B C A
400
C h in a B K A
300 200 100 0 - 1 01 09 8 2 1 9 8 4 1 9 8 6 1 9 8 8 1 9 9 0 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 -200 -300
Ja p a n B CA Ja p a n B K A G ermany B CA G ermany B KA UK BCA UK BKA
-400
U .S . B C A
-500
U .S . B K A
Source: IMF International Financial Statistics Yearbook, 2000 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res 3-
3-1
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
Balance of Payments Accounts The balance of payments accounts are those that record all transactions between the residents of a country and residents of all foreign nations. They are composed of the following:
3-2
The Current Account The Capital Account The Official Reserves Account Statistical Discrepancy
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
The Current Account Includes all imports and exports of goods and services. Includes unilateral transfers of foreign aid. If the debits exceed the credits, then a country is running a trade deficit. If the credits exceed the debits, then a country is running a trade surplus.
3-3
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
The Capital Account The capital account measures the difference between sales of assets to foreigners and purchases of foreign assets. The capital account is composed of Foreign Direct Investment (FDI), portfolio investments and other investments.
3-4
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
Statistical Discrepancy
There’s going to be some omissions and misrecorded transactions—so we use a “plug” figure to get things to balance.
3-5
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
The Official Reserves Account
Official reserves assets include gold, foreign currencies, SDRs, reserve positions in the IMF.
3-6
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
The Balance of Payments Identity BCA + BKA + BRA = 0 where BCA = balance on current account BKA = balance on capital account BRA = balance on the reserves account Under a pure flexible exchange rate regime, BCA + BKA = 0 3-7
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
U.S. Balance of Payments Data Credits
Debits
Current Account 1
Exports
2
Imports
$1,418.64 ($1,809.18)
3
Unilateral Transfers Balance on Current Account Capital Account 4 5 6
Direct Investment Portfolio Investment Other Investments Balance on Capital Account
7
Statistical Discrepancies Overall Balance Official Reserve Account 3-8
$10.24
($64.39) ($444.69)
$287.68 $474.39 $262.64 $444.26 0.73 $0.30
($152.44) ($124.94) ($303.27)
($0.30)
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
U.S. Balance of Payments Data Credits
Debits
Current Account 1
Exports
2
Imports
$1,418.64 ($1,809.18)
3
Unilateral Transfers Balance on Current Account Capital Account 4 5 6
Direct Investment Portfolio Investment Other Investments Balance on Capital Account
7
Statistical Discrepancies Overall Balance Official Reserve Account 3-9
$10.24
($64.39) ($444.69)
$287.68 $474.39 $262.64 $444.26 0.73 $0.30
($152.44) ($124.94) ($303.27)
In 2000, the U.S. imported more than it exported, thus running a current account deficit of $444.69 billion.
($0.30)
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
U.S. Balance of Payments Data Credits
Debits
Current Account 1
Exports
2
Imports
$1,418.64 ($1,809.18)
3
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7
Direct Investment Portfolio Investment Other Investments Balance on Capital Account
Statistical Discrepancies Overall Balance Official Reserve Account 3-
$10.24
($64.39) ($444.69)
$287.68 $474.39 $262.64 $444.26 0.73 $0.30
($152.44) ($124.94) ($303.27)
($0.30)
During the same year, the U.S. attracted net investment of $444.26 billion —clearly the rest of the world found the U.S. to be a good place to invest.
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
U.S. Balance of Payments Data Credits
Debits
Current Account 1
Exports
2
Imports
$1,418.64 ($1,809.18)
3
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7
Direct Investment Portfolio Investment Other Investments Balance on Capital Account
Statistical Discrepancies Overall Balance Official Reserve Account 3-
$10.24
($64.39) ($444.69)
$287.68 $474.39 $262.64 $444.26 0.73 $0.30
($152.44) ($124.94) ($303.27)
Under a pure flexible exchange rate regime, these numbers would balance each other out.
($0.30)
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
U.S. Balance of Payments Data Credits
Debits
Current Account 1
Exports
2
Imports
$1,418.64 ($1,809.18)
3
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7
Direct Investment Portfolio Investment Other Investments Balance on Capital Account
Statistical Discrepancies Overall Balance Official Reserve Account 3-
$10.24
($64.39) ($444.69)
$287.68 $474.39 $262.64 $444.26 0.73 $0.30
($152.44) ($124.94) ($303.27)
In the real world, there is a statistical discrepancy.
($0.30)
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
U.S. Balance of Payments Data Credits
Debits
Current Account 1
Exports
2
Imports
$1,418.64 ($1,809.18)
3
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7
Direct Investment Portfolio Investment Other Investments Balance on Capital Account
Statistical Discrepancies Overall Balance Official Reserve Account
$10.24
($64.39) ($444.69)
$287.68 $474.39 $262.64 $444.26 0.73 $0.30
($152.44) ($124.94) ($303.27)
Including that, the balance of payments identity should hold: BCA + BKA = – BRA
($0.30)
($444.69) + $444.26 + $0.73 = $0.30= –($0.30) 3-
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
Balance of Payments and the Exchange Rate Credits
Debits
Current Account 1
Exports
2
Imports
Direct Investment Portfolio Investment Other Investments Balance on Capital Account
Statistical Discrepancies Overall Balance Official Reserve Account 3-
S
($1,809.18)
Unilateral Transfers Balance on Current Account Capital Account
7
P
$1,418.64
3
4 5 6
Exchange rate $
$10.24
($64.39) ($444.69)
$287.68 $474.39 $262.64 $444.26 0.73 $0.30
($152.44) ($124.94) ($303.27)
D Q
($0.30)
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
Balance of Payments and the Exchange Rate Credits
Debits
Current Account 1
Exports
2
Imports
S
($1,809.18)
Unilateral Transfers Balance on Current Account Capital Account Direct Investment Portfolio Investment Other Investments Balance on Capital Account
7
P
$1,418.64
3
4 5 6
Exchange rate $
Statistical Discrepancies Overall Balance Official Reserve Account
$10.24
($64.39) ($444.69)
$287.68 $474.39 $262.64 $444.26 0.73 $0.30
($152.44) ($124.94) ($303.27)
D Q
($0.30)
As U.S. citizens import, they are supply dollars to the FOREX market. 3-
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
Balance of Payments and the Exchange Rate Credits
Debits
Current Account 1
Exports
2
Imports
S
($1,809.18)
Unilateral Transfers Balance on Current Account Capital Account
7
P
$1,418.64
3
4 5 6
Exchange rate $
Direct Investment Portfolio Investment Other Investments Balance on Capital Account
Statistical Discrepancies Overall Balance Official Reserve Account
$10.24
($64.39) ($444.69)
$287.68 $474.39 $262.64 $444.26 0.73 $0.30
($152.44) ($124.94) ($303.27)
D Q
($0.30)
As U.S. citizens export, others demand dollars at the FOREX market. 3-
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
Balance of Payments and the Exchange Rate Credits
Debits
Current Account 1
Exports
2
Imports
($1,809.18)
Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7
P
$1,418.64
3
Direct Investment Portfolio Investment Other Investments Balance on Capital Account
Statistical Discrepancies Overall Balance Official Reserve Account
Exchange rate $
$10.24
($64.39) ($444.69)
$287.68 $474.39 $262.64 $444.26 0.73 $0.30
($152.44) ($124.94) ($303.27)
S
S1
D Q
($0.30)
As the U.S. government sells dollars, the supply of dollars increases. 3-
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
Balance of Payments Trends Since 1982 the U.S. has experienced continuous deficits on the current account and continuous surpluses on the capital account. During the same period, Japan has experienced the opposite.
3-
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
Balances on the Current (BCA) and Capital (BKA) Accounts of the United States 500 400 300 200 100 0 -1001982 1984 1986 1988 1990 1992 1994 1996 1998 2000
U.S. BCA U.S. BKA
-200 -300 -400 -500
Source: IMF International Financial Statistics Yearbook, 2000 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res 3-
Balances on the Current (BCA) and Capital (BKA) Accounts of United Kingdom 40 30 20 10 0 -101982
UK BCA 1984
1986
1988
1990
1992
1994
1996
1998
2000
UK BKA
-20 -30 -40 -50
Source: IMF International Financial Statistics Yearbook, 2000 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res 3-
Balances on the Current (BCA) and Capital (BKA) Accounts of Japan 150 100 50 0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 -50
Japan BCA Japan BKA
-100 -150
Source: IMF International Financial Statistics Yearbook, 2000 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res 3-
Balances on the Current (BCA) and Capital (BKA) Accounts of Germany 80 60 40 20 0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 -20
Germany BCA Germany BKA
-40 -60 -80
Source: IMF International Financial Statistics Yearbook, 2000 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res 3-
Balances on the Current (BCA) and Capital (BKA) Accounts of China 35 30 25 20 15 10 5
China BCA China BKA
0 -51982 1984 1986 1988 1990 1992 1994 1996 1998 2000 -10 -15
Source: IMF International Financial Statistics Yearbook, 2000 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res 3-
Balance of Payments Trends Germany traditionally had current account surpluses. Since 1991 Germany has been experiencing current account deficits. This is largely due to German reunification and the resultant need to absorb more output domestically to rebuild the former East Germany. What matters is the nature and causes of the disequilibrium.
3-
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
Balances on the Current (BCA) and Capital (BKA) Accounts of Five Major Countries 500
C h in a B C A
400
C h in a B K A
300 200 100 0 - 1 01 09 8 2 1 9 8 4 1 9 8 6 1 9 8 8 1 9 9 0 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 -200 -300
Ja p a n B CA Ja p a n B K A G ermany B CA G ermany B KA UK BCA UK BKA
-400
U .S . B C A
-500
U .S . B K A
Source: IMF International Financial Statistics Yearbook, 2000 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res 3-
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