International Economics
By Robert J. Carbaugh
9th Edition
Chapter 11:
The Balance of Payments
Carbaugh, Chap. 11
Balance of Payments
A record of international transactions between residents of one country and the rest of the world
International transactions include exchanges of goods, services or assets
“Residents” means businesses, individuals and government agencies, including citizens temporarily living abroad but excluding local subsidiaries of foreign corporations
The Balance of Payments
Carbaugh, Chap. 11
Double-entry accounting in the BOP
All transactions are either debit or credit transactions
Credit transactions result in receipt of payment from abroad
Merchandise exports
Transportation and travel receipts
Income received from investments abroad
Gifts received from foreign residents
Aid received from foreign governments
Local investments by overseas residents
The Balance of Payments
Carbaugh, Chap. 11
Double-entry accounting (cont’d)
Debit transactions lead to payments to foreigners
Merchandise imports
Transportation and travel expenditures
Income paid on investments of foreigners
Gifts to foreign residents
Aid given by home government
Overseas investments by home country residents
Each credit transaction has a balancing debit transaction, and vice versa, so the overall balance of payments is always in balance
The Balance of Payments
Carbaugh, Chap. 11
Current account
Goods and services balance
Merchandise trade balance
Services balance
Investment income (net)
Unilateral transfers
Private transfer payments
Governmental transfers
Structure of the Balance of Payments
Carbaugh, Chap. 11
Capital and financial account
All purchases or sales of assets, including:
Direct investment
Securities (debt)
Bank claims and liabilities
Official settlements transactions
Structure of the Balance of Payments
Carbaugh, Chap. 11
Current account surplus and deficit
Current account and capital & financial account balance each other; when one is in surplus the other must be in deficit
Current account surplus means exports of goods and services, investment income and transfers exceed imports and outflows
Current account deficit means imports of goods and services, and outflows are greater than exports and inflows; must be financed by borrowing (capital account inflows)
Current account
Carbaugh, Chap. 11
US Balance of Payments, 2001 ($ bill.)
Balance of Payments
Current account
Merchandise trade
exports $
imports -1,
Net
Services
Travel & transport recpts.
other services, net
All services, net
Balance on goods & services
Cont’d.
Carbaugh, Chap. 11
US Balance of Payments, 2001 ($ bill.)
Balance of Payments
Current account (cont’d)
Income receipts & payments
investment income, net
employee compensation
All income, net
Unilateral transfers, net
Balance on current account $
Carbaugh, Chap. 11
US Balance of Payments, 2001 ($ bill.)
Balance of Payments
Capital & financial account
Capital account transactions, net
Financial account transactions, net
Statistical discrepancy
Balance on capital & financial account $
Carbaugh, Chap. 11
US Balance of Payments 1970-2001
Balance of Payments
Carbaugh, Chap. 11
Current account deficit a problem?
Current account deficit has little to do with foreign trade practices or competitiveness
Determined mostly by domestic macro-economic conditions that cause demand to exceed supply and increase imports (paid for with borrowing)
Whether a current account deficit is good or bad depends on whether the borrowed funds are used to pay for consumption or investment
Balance of Payments
Carbaugh, Chap. 11
Balance of international indebtedness
Summarizes one nation’s overall quantity of assets and liabilities against the rest of the world
Shows whether the nation is a net debtor or a net creditor
Indicates sensitive items, such as short term debt held by foreigners which could be liquidated quickly, straining finances
Balance of Payments
Carbaugh, Chap. 11
