Chapter 13: Balance of Payments

Questions for review:

1. What is meant by the balance of payments? In what way is the balance of payments a summary
statement? What is meant by an international transaction? How is a resident of a nation defined? In
what way is the time element involved in measuring a nation’s balance of payments?
- The balance of payments is a summary statement in which, in principle, all the transactions of the
residents of a nation with the residents of all other nations are recorded during a particular period of
time, usually a calendar year.
- As a summary statement, the balance of payments aggregates all merchandise trade into a few major
categories. Similarly, only the net balance of each type of international capital flow is included
- An international transaction refers to the exchange of a good, service, or assets (for which payment
is usually required) between the residents of one nation and the residents of other nations.
- Residents of a nation are diplomats, military personnel, tourists, and workers who temporarily migrate
are residents of the nation in which they hold citizenship.
- BoP is calculated during a particular period of time, usually a calendar year
2. What is a credit transaction? a debit transaction? Which are the broad categories of international
transactions classified as credits? as debits?
- Credit transactions are those that involve the receipt of payments from foreigners.
- Debit transactions are those that involve the making of payments to foreigners.
- The export of goods and services, unilateral transfers (gifts) received from for- eigners, and capital
inflows are entered as credits
- the import of goods and services, unilateral transfers or gifts made to foreigners, and capital outflows
involve payments to foreigners and are entered as debits
3. What is double-entry bookkeeping? Why does double-entry bookkeeping usually involve an entry
called statistical discrepancy? How does such a statistical discrepancy arise?
- Double-entry bookkeeping means that each international transaction is recorded twice, once as a
credit and once as a debit of an equal amount.
- Statistical discrepancy is required to make the total credits (including the statistical discrepancy)
equal to the total debits, as required by double-entry bookkeeping.
- Statistical discrepancies are particularly likely to arise in recording short-term international private
capital flows.
4. What is meant by the current account? Did the United States have a deficit or a surplus in the current
account in 2011? What was its size?
- The current account lumps together all sales and purchases of currently produced goods and services,
investment incomes, and unilateral transfers and provides the link between the nation’s international
transactions and its national income.
- Current account net = Balance on goods, services, and income + Unilateral current transfers, net
= -333 - 133 = -466
- The current account net debit balance of (−)$466 billion which meant the United State have a deficit in
the current account in 2011
5. What was the size of the net financial outflows (including U.S. official reserve assets) in 2011? What
was the size of the net financial inflows to the United States in 2011?
- Net financial outflows = U.S. official reserve assets + U.S. government assets, other than official
reserve assets + U.S. private assets = -16 - 104 - 364 = -484
 - The net financial outflows of the United States in 2011 is (-)$484
- Net financial inflows = Foreign official assets in the U.S. + Other foreign assets in the U.S. = 212 + 789
= 1,001
- The net financial inflows of the United States in 2011 is (+)$1,001
6. Why is the classification of international financial flows into short term and long term not stressed
anymore today as it was in the past?
- Because too much attention has been generally placed on the balance on goods and on short-term
data due to the fact that data on the quarterly trade balance on goods are the first to become
available.
-> Leads to dangerous extrapolation & misleading in analyzing a country’s BoP.
7. How was the statistical discrepancy of (−) $89 billion for 2011 arrived at? By how much did U.S.
official reserve assets change in 2011? By how much did foreign official reserve assets change in
2011?
- Since the overall credit total of (+)$3,888 billion exceeds the overall debit total of (−)$3,798 billion by
(+)$90 billion
- U.S. official reserve assets changed by (-)$16 in 2011
- Foreign official reserve assets changed by (+)$212 in 2011
8. Which items does the financial account include? What is meant by the autonomous transactions?
accommodating transactions? Which items does the official reserve account include?
- The financial account includes private and official capital flows
- The autonomous transactions means the net debit balance on all non-official.
- The accommodating transactions means the equal credit balance on official reserve.
9. How is an official settlements deficit or surplus measured? What was the size of the U.S. balance of
payments in 2011?
- The official settlements balance or balance of payments is given by the sum of the current account
balance, the capital account balance, the balance in the financial account (excluding official or reserve
transactions or flows but including the net balance of financial derivatives), and the statistical
discrepancy
- The U.S. balance of payments = Current account, net + Capital account balance + the increase in
U.S.-owned assets abroad other than U.S. official reserve assets + The increase in non-official
foreign-owned assets in the United States + Net financial derivatives + Statistical discrepancy
= -466 - 1 - 468 + 789 + 39 - 89 = -196
- United States had a balance of payments deficit of (−)$196 billion in 2011
10. What are the most serious pitfalls to avoid in analyzing a nation’s balance of payments or statements
of international transactions?
- It is dangerous to extrapolate for the year based on quarterly data, due to its availability.
- Misleading of a positive trade balance on goods, which is usually considered favorable, but it also
means that the nation has fewer goods to consume domestically.
- A large and persistent trade deficit (say, in excess of 2 or 3 percent of GDP) may not be sustainable in
the long run for an individual country.
- Trying to establish causality to one partner without acknowledging that international transactions are
closely interrelated rather than independent, and the interpretation of a nation’s statement of
international transactions must be approached very cautiously.
11. What were the cause and effect of the large U.S. trade imbalance during the postwar period?
- Cause: the sharp rise in the price of imported petroleum products during the 1970s, the high
international value of the dollar in the 1980s, and the more rapid growth of the United States than
Europe and Japan during the 1990s and 2000s
12. What is meant by the international investment position of a nation, or its balance of international
indebtedness? What is its relationship to the nation’s balance of payments?
- The international investment position measures the total amount and the distribution of a nation’s
assets abroad and foreign assets in the nation at the end of the year.
- The balance of payments represents a flow concept, and the international investment position
represents a stock concept.
13. What is the most important use of the statement of the international investment position of a nation?
- The statement of a nation’s international investment position can be used to project the future flow of
income or earnings from the nation’s foreign investments and the flow of payments on foreign
investments in the nation.
14. What are the benefits and risks of the United States becoming a net debtor nation?
- Benefits: large foreign investments allowed the United States to finance about half of its budget deficit
during the mid-1980s without the need for higher interest rates and more“crowding out” of private
investments.
- Risks:
- The portion of foreign investments that simply went to finance larger U.S. consumption
expenditures led to interest and dividend payments to foreign investors and represents a real
burden or drain on future consumption and growth in the United States.
- Foreigners, for whatever reason, may suddenly withdraw their funds. This would lead to a
financial crisis and much higher interest rates in the United States.
Problems:
1. Indicate how each of the following international transactions is entered into the U.S. balance of
payments with double-entry bookkeeping:
(a) A U.S. resident imports $500 worth of merchandise from a U.K. resident and agrees to pay in three
months.
- If a U.S. resident imports $500 worth of merchandise from a U.K. resident to be paid in three months,
he debits because this goods import will lead to the necessity to pay to foreigners (a U.K. resident). In
this situation, the capital inflow is $500 which is the credit because the U.K. exporter waits for the
payment and extends the credit to the U.S. resident. Thus, the U.S. assets presented abroad decrease.

Credit (+) Debit (-)

Goods import $500

Capital inflow $500

(b) After the three months, the U.S. resident pays for his imports by drawing down his bank balances in
London.
- When the U.S. resident pays for his imports, he debits because he purchases foreign goods. It is the
capital outflow from the United States. Thus, it is a capital debit of $500 in the national balance of
payments. However, the way of the payment influences the balance, and the payment with the help of
drawing down his bank balances abroad (in London) leads to the reduction of the U.S. assets
presented abroad and can be considered as the financial inflow to the United States or as a credit.
 Credit (+) Debit (-)

Financial outflow (the payment $500

which increases U.S. assets
abroad)

Financial inflow (which is the $500

reduction of the U.S. assets
abroad)
(c) What is the net effect of transactions (a) and (b) on the U.S. balance of payments if they occur during the
same year?
- The net capital balance is $500 according to the complex proportion of the financial inflow ($1000)
and financial outflow ($500) which can be considered as the positive tendency for the international
transactions during the year. Nevertheless, total debits should always be equal to total credits
according to the principles of double-entry bookkeeping.

Credit (+) Debit (-)

Goods import $500

Financial flows, net $500

Total debits and credits $500 $500

2. Indicate how each of the following international transactions is entered into the U.S. balance of
payments with double-entry bookkeeping:
(a) The U.S. government gives a $100 cash balance in a U.S. bank to a developing nation as part of the U.S.
foreign aid program.
- When the U.S. government gives a $100 cash balance to a developing nation as part of the U.S. foreign
aid program it brings out the unilateral transfers. These unilateral transfers can be considered as
payment to foreigners. Thus, the U.S. government debits $100. Nevertheless, the operation is
accomplished with the help of the U.S. bank. This situation can be discussed as the capital inflow or
credit because foreign assets increase in the USA.

Credit (+) Debit (-)

Unilateral transfer $100

Financial inflow $100

(b) The developing nation uses the $100 bank balance to import $100 worth of food from the United States.
- When the United States gives unilateral transfers to a foreign country it is the financial outflow or debit
which increases the national assets abroad. However, when the developing country imports the food
from the United States this situation can be considered as the capital inflow or a credit.

Credit (+) Debit (-)

Financial; outflow (the U.S. $100

helping the nation)

Financial inflow (the U.S. $100

exports goods)
 (c) What is the net effect of transactions (a) and (b) on the U.S. balance of payments if they occur during the
same year?
- The net capital balance is 0 according to the complex proportion of the financial inflow ($100) and
financial outflow ($100) which can be considered as the neutral effect for the international
transactions during the year. Thus, total debits are equal to total credits according to the principles of
double-entry bookkeeping.

Credit (+) Debit (-)

Food $100

Unilateral transfer $100

Financial, net 0

Total debits and credits $100 $100

3. Indicate how the following transaction is entered into the U.S. balance of payments with
double-entry bookkeeping:
(a) The U.S. government gives $100 worth of food aid to a developing nation.
- When the U.S. government gives a $100 worth of food aid to a developing nation as part of the U.S.
foreign aid program it brings out the unilateral exchange. These unilateral transfers can be considered
as payment to foreigners. This transaction will be recorded as debit on the unilateral exchange and
credit on the financial outflow.

Credit (+) Debit (-)

Unilateral exchange $100

Financial outflow $100

(b) What is the difference in their effect on the balance of payments between transaction (a) in this
problem, on the one hand, and the net result of transactions (a) and (b) in Problem 2, on the other?
- We see in transactions in Q. 2 first the financial account is credited and when foreign country imports,
the financial account is debited hence financial account is left unchanged, the net result of the
transaction is: The debit of $100 in unilateral transfers and the credit of $100 in current account (the
current account is also said US exports and imports account)
- Whereas in food aid's case financial account is credited which is a capital outflow this result in an
adverse balance of payment for the US.
4. Indicate how the following transaction is entered into the U.S. balance of payments with
double-entry bookkeeping: A U.S. resident purchases a $1,000 foreign stock and pays for it by
drawing down her bank balances abroad.
- This would be a reduction in U.S. assets abroad, which is also a financial inflow to the United States
and a credit.

Credit (+) Debit (-)

Financial outflow (the reduction $1000

in foreign bank balances in the
U.S.)
 Financial inflow (the purchase of $1000
the foreign stock by the U.S.
resident)
5. Indicate how the following transaction is entered into the U.S. balance of payments with
double-entry bookkeeping: A U.S. resident receives a dividend of $100 on her foreign stock and
deposits it into her bank account abroad.
- This would be recorded as credit on income payments on foreign assets in the U.S and debit on the
financial inflow since this transaction increase foreign bank balances in the U.S.

Credit (+) Debit (-)

Income payments on foreign $100

assets in the U.S

Financial inflow (the increase in $100

foreign bank balances in the
U.S.)
6. Indicate how the following transaction is entered into the U.S. balance of payments with
double-entry bookkeeping: A foreign investor purchases $400 of U.S. treasury bills and pays by
drawing down his bank balances in the United States.

Credit (+) Debit (-)

Capital inflow ( the purchase of $400

U.S. treasury bills by foreigner)

Capital outflow (the reduction in $400

foreign bank balances in the
U.S.)
7. Indicate how the following transaction is entered into the U.S. balance of payments with
double-entry bookkeeping: At maturity (during the same year), the foreign investor of Problem 6
receives $440 for the principal and interest earned and deposits these dollars in his bank account in
his own nation.

Credit (+) Debit (-)

Income payments on foreign $440

assets in the U.S.

Capital outflow (the increase in $440

foreign bank balances)
8. Indicate how the following transaction is entered into the U.S. balance of payments with
double-entry bookkeeping:
(a) A U.S. commercial bank exchanges $800 worth of pounds sterling for dollars at the Federal Reserve
Bank of New York.

Credit (+) Debit (-)

U.S. official reserve assets $800

 Bank claims $800
(b) What effect does this transaction have on the official settlements balance of the United States?
- This transaction occurred in the U.S. so it won’t affect the national balance of payment
9. Below:
(a) From Table 13.3, calculate the official settlements balance of the United States for each year from 1965
to 2011.
- Adding together columns 7 (Increase in U.S. Official Reserve Assets) and 8 (Increase in Foreign Official
Assets in the U.S.) gives the official settlements balance.
Year Official settlements balance of the United States
1965 1
1966 0
1967 3
1968 -2
1969 -2
1970 10
1971 30
1972 11
1973 6
1974 10
1975 6
1976 15
1977 37
1978 35
1979 -14
1980 8
1981 1
1982 -1
1983 5
1984 0
1985 -5
1986 36
1987 54
1988 36
1989 -16
1990 32
 1991 23
1992 44
1993 71
1994 45
1995 100
1996 134
1997 18
1998 -27
1999 53
2000 43
2001 23
2002 112
2003 280
2004 401
2005 273
2006 490
2007 481
2008 550
2009 428
2010 396
2011 196
(b) Why is this an appropriate measure for the U.S. balance-of-payments position until 1972, but not as
appropriate since 1973?
- This was because of the collapse of Bretton Woods system – a “global fixed exchange rate system”
since 1944, after a sharp drop in US gold reserves and demand in USD of foreigners increased rapidly.
Washington suspended the conversion of dollars to gold and devalued the dollar. By 1973, most
countries had adopted a floating exchange rate system.
10. Update Table 13.1 for the most recent year
Credit (+) Debit (-)
Exports of goods and services and income receipts 3,780,154

Exports of goods and services 2,556,638

Goods 1,761,364
Services 795,273
Primary income receipts 1,052,080
Secondary income (current transfer) receipts 171,436
Imports of goods and services and income payments (debits) 4,626,508
Imports of goods and services 3,401,685
Goods 2,851,660
Services 550,025
Primary income payments 912,587
Secondary income (current transfer) payments 312,236
Capital account
Capital transfer receipts and other credits 3,864
Capital transfer payments and other debits 6,338
Financial account
Net U.S. acquisition of financial assets excluding financial
1,278,599
derivatives (net increase in assets / financial outflow (-))
Direct investment assets 421,749
Portfolio investment assets 719,095
Other investment assets 23,763
Reserve assets 113,993
Net U.S. incurrence of liabilities excluding financial
1,977,294
derivatives (net increase in liabilities / financial inflow (+))
Direct investment liabilities 448,325
Portfolio investment liabilities 676,112
Other investment liabilities 852,857
Financial derivatives other than reserves, net transactions -41,902
Statistical discrepancy 108,231
Balances
Balance on current account -846,354
Balance on goods and services -845,047
Balance on primary income 139,493
Balance on secondary income -140,800
Balance on capital account -2,474
Net lending (+) or net borrowing (-) from current and
-848,828
capital-account transactions
Net lending (+) or net borrowing (-) from financial-account
-740,597
transactions
11. Update Table 13.2 for the most recent year.
Imports Value (Millions of U.S. Dollar)
Agricultural products 186,062
Food 162,948
Fuels and mining products 185,778
Fuels 129,940
Manufactures 1,891,603
Iron and steel 23,604
Chemicals 282,704
Pharmaceuticals 143,677
Machinery and transport equipment 998,346
Office and telecom equipment 350,748
Electronic data processing and office equipment 148,942
Telecommunications equipment 140,606
Integrated circuits and electronic components 61,200
Transport equipment 313,806
Automotive products 260,069
Textiles 45,165
Clothing 82,417

Exports Value (Millions of U.S. Dollar)

Total merchandise 1,424,935

Agricultural products 170,493
Food 143,939
Fuels and mining products 201,283
Fuels 154,965
Manufactures 915,224
Iron and steel 10,859
Chemicals 212,346
Pharmaceuticals 56,030
Machinery and transport equipment 471,473
Office and telecom equipment 140,610
Electronic data processing and office equipment 46,375
Telecommunications equipment 36,970
Integrated circuits and electronic components 57,265
Transport equipment 136,265
Automotive products 110,388
Textiles 11,377
Clothing 4,835
12. Update Table 13.3 for the most recent year.
Exports of goods and services and income receipts 3,780,154
Imports of goods and services and income payments (debits) 4,626,508
Balance on goods and services -845,047
Balance on primary income 139,493
Balance on secondary income -140,800
Balance on current account -846.354
13. Update Table 13.4 for the most recent year.
Countries Export Import Total Net Balance
Canada 364,502 398,270 762,772 -33,768
China 192,038 526,807 718,845 -334,769
Mexico 307,111 418,633 725,744 -111,522
Japan 112,092 167,010 279,102 -54,918
Germany 97,401 170,617 268,018 -73,216
United Kingdom 129,279 117,888 247,167 11,391
Korea, Rep. of 86,086 108,443 194,529 -22,357
Brazil 62,071 36,482 98,553 25,589
France 47,135 68,951 116,086 -21,816
Taiwan (China) 47,258 86,908 134,166 -39,650
Netherlands 76,908 47,398 124,306 29,510
India 58,408 102,111 160,519 -43,703
Singapore 65,124 40,857 105,981 24,267
Italy 28,096 66,998 95,094 -38,902
14. Update Table 13.5 for the most recent year.

Yearend position, Change in position in Yearend position,

2020 2021 2021

U.S. net investment

-14,011.20 -4,089.90 -18,101.2
position

Net position excl.

-14,004.6 -4,116.1 -18,120.7
derivatives
 Financial derivatives,
-6.6 26.2 19.6
net

U.S. assets 32,356.3 2,954.4 35,210.7

Assets excl.
29,710.6 3,512.1 33,222.7
derivatives

Financial derivatives 2,545.7 -557.8 1,998.0

U.S. Liabilities 46,267.6 7,044.3 53,311.9

Liabilities excl.
43,715.2 7,628.2 51,343.5
derivatives

Financial derivatives 2,552.4 -584.0 1,968.4