ch13 Salvatore PPP

CHAPTER T H I R T E E N
13 International
Economics
Balance of Payments
Dominick Salvatore
John Wiley & Sons, Inc.
Salvatore: International Economics, 11th Edition © 2013 John Wiley & Sons, Inc.
Learning Goals:
 Understand what the balance of payment is and
what it measures
 Describe the change in the U.S. balance of
payments over the years
 Understand the importance of the serious
deterioration of the trade balance and net
international investment position of the United
States in recent years.
Introduction
 The balance of payments provides a summary

statement of international transactions for a
nation for a specified period of time.
 An international transaction is the exchange of a
good, service or asset between residents of one
nation and residents of another nation.
 The main purpose of the balance of payments is
to help the government in formulation monetary,
fiscal and trade policies.
Balance of Payments Accounting Principles
 Credit transactions (+)

 Transactions that involve receipt of payments
from foreign sources.
 Major types:
 Exports of goods and services
 Unilateral transfers (gifts) from foreigners
 Financial inflows
 Increase in foreign assets in a nation
 Reduction in a nation’s assets abroad
 Debit transactions (-)

 Transactions that involve payment to foreign
sources.
 Major types:
 Imports of goods and services
 Unilateral transfers (gifts) to foreigners
 Financial outflows
 Increase in a nation’s assets abroad
 Reduction in foreign assets in a nation
 In balance of payment accounting, each

international transaction is recorded twice – once
as a credit, once as a debit.
 Examples:
 $500 in exports to be paid in 3 months time
Credit (+) Debit (-)

Goods export $500
Financial outflow $500

 Examples:
 $200 spent by a U.S. tourist in London on services

Travel services (purchased
$200
from foreigners)
Financial inflow $200

 Examples:
 $100 in US government foreign aid given to the
government of a developing nation
Unilateral transfers made $100
Financial inflow $100

 Examples:
 $400 in foreign stock purchased by U.S. resident

Financial outflow (purchase of foreign
$400
stock by U.S resident)
Financial inflow (increase in foreign
$400
bank balances in U.S.)

 Examples:
 $300 of U.S. Treasury bills purchased by foreign
investor from his U.S. bank account
Financial inflow (purchase of U.S.
$300
Treasury bills by foreigner)
Financial outflow (reduction in
$300
foreign bank balances in U.S.)
The International Transactions of the United
States
The International Transactions of the United
States
Accounting Balances and the Balance of
Payments
 Current Account
 All sales and purchases of currently produced
goods and services, investment incomes and
unilateral transfers, providing link between
international transactions and national
income.
 Current account surplus stimulates domestic
production and income
 Current account deficit dampens domestic
production and income
Payments
 Capital Account
 Includes debt forgiveness and goods and
financial assets that migrants take with them
as they leave or enter the country.
 The U.S. deficit in the current and capital
accounts in 2007 are financed or covered by an
equal net inflow of capital abroad.
Payments
 Financial Account
 Shows the change in U.S.-owned assets abroad
and foreign-owned assets in the United States.
 The U.S. covers its current and capital account
deficits with an equal net financial account
surplus.
Payments
 If net private capital inflows do not cover the

current and capital accounts deficit, the nation has
a deficit in its balance of payments equal to the
difference, which needs to be covered by a net
credit balance on official (i.e., monetary authorities’)
reserve transactions.
 Official settlements balance - The balance on official
reserve transactions, also called the balance of
payments.
 Official reserve account – The account in which
official reserve transactions are entered.
Payments
Current account balance

+ capital account balance
+ financial account balance (less official reserve
transactions, but including net balance of financial derivatives)
+ statistical discrepancy
Balance of Payments
Payments
 Deficit in the balance of payments (negative sum of

- covered by an equal amount
account balances)
official reserves transaction (reduction in
international reserves of the nation or increase in
foreign holdings of official assets of the nation).
 Surplus in the balance of payments (positive sum of
- settled by an increase in the
account balances)
nation’s international reserves and/or reduction in
foreign official holdings of nation’s assets.
The Postwar Balance of Payments of the
United States
 Points to keep in mind when examining

balance of payments:
1. Too much attention is usually placed on
balance of goods and short term data.
 Dangerous to extrapolate for year based on
quarterly data.
United States

2. International transactions are closely
interrelated rather than independent.
 For example, cutting U.S. foreign aid programs
also reduces ability of recipients to import U.S.
goods, so improvement in U.S. balance of
payments may be much less than reduction in
aid.
United States

3. An attempt to reduce the U.S. trade deficit
with respect to a nation such as Japan is
likely to reduce the U.S. surplus with respect
to Brazil because Brazil pays for U.S. goods
partly through natural resource exports to
Japan.
United States
United States
The International Investment Position of the
United States
United States
 A nation’s BOP measures international flow

of goods, services and capital during a one-
year period (flow concept).
 A nation’s international investment position

measures total amount and distribution of
assets abroad and foreign assets in the nation
at the end of the year (stock concept).
United States
 Also known as balance of international

indebtedness.
 Useful in projecting the future flow of income

from U.S. foreign investments and payments
on foreign investments in the U.S.
FIGURE 13-3 The U.S. Current Account Balance and the Net Investment Position,
1980-2011
Case Study 13-1 The Major Goods Exports
and Imports of the United States
Case Study 13-2 The Major Trade Partners of
the United States
Case Study 13-3 The U.S. Trade Deficit with
Japan
FIGURE 13-1 The U.S. Trade Balance with Japan in Goods and in
Goods and Services, 1980-2011.
Case Study 13-4 The Exploding U.S. Trade
Deficit with China
FIGURE 13-2 U.S. Exports, Imports, and Net Trade Balance in

Goods with China, 1985-2011 (billions of dollars).
Appendix: The IMF Method of Reporting
International Transactions
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information herein.

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CHAPTER T H I R T E E N

 The balance of payments provides a summary

 Credit transactions (+)

 Debit transactions (-)

 In balance of payment accounting, each

Credit (+) Debit (-)

 In balance of payment accounting, each

Credit (+) Debit (-)

 In balance of payment accounting, each

 In balance of payment accounting, each

Credit (+) Debit (-)

 In balance of payment accounting, each

 If net private capital inflows do not cover the

Current account balance

 Deficit in the balance of payments (negative sum of

 Points to keep in mind when examining

 Points to keep in mind when examining

 Points to keep in mind when examining

 A nation’s BOP measures international flow

 A nation’s international investment position

 Also known as balance of international

 Useful in projecting the future flow of income

FIGURE 13-2 U.S. Exports, Imports, and Net Trade Balance in

 All rights reserved. Reproduction or translation of this work beyond

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