International Economics
By Robert J. Carbaugh
7th Edition
Chapter 11:
The balance of payments
Copyright ©2000, South-Western College Publishing
The Balance of Payments
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
Carbaugh, Chap. 11
2
The Balance of Payments
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
Carbaugh, Chap. 11
3
The Balance of Payments
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
Carbaugh, Chap. 11
4
Structure of the Balance of Payments
Current account
 Goods and services balance
 Merchandise trade balance
 Services balance
 Investment income
 Unilateral transfers
 Private transfer payments
 Governmental transfers
Carbaugh, Chap. 11
5
Structure of the Balance of Payments
Capital account
 All purchases or sales of assets, including:




Direct investment
Securities (debt)
Bank claims and liabilities
Official settlements transactions
Carbaugh, Chap. 11
6
Current account
Current account surplus and deficit
 Current account and capital 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)
Carbaugh, Chap. 11
7
Balance of Payments
US Balance of Payments, 1997 ($ bill.)
Current account
Merchandise trade
exports
$678.3
imports
-877.2
Net
Services
military trans. (net)
3.8
other services, net
81.5
All services, net
Balance on goods & services
Investment income, net
Carbaugh, Chap. 11
-198.9
85.3
-113.6
-14.3
Cont’d.
8
Balance of Payments
US Balance of Payments, 1997 ($ bill.)
Current account (cont’d)
Unilateral transfers
US government grants
-11.6
US govt pensions, and
other transfers
-4.2
Private remittances and
other transfers
-22.8
All transfers, net
-38.6
Balance on current account
$-166.5
Carbaugh, Chap. 11
9
Balance of Payments
US Balance of Payments, 1997 ($ bill.)
Capital account
Changes in US assets abroad, net
US official reserve assets -1.0
other US govt assets
0.2
US private assets
-426.1
All changes, net
-426.9
Changes in foreign assets in the US, net
foreign official assets
18.2
foreign private assets
672.3
All changes, net
690.5
Allocation of SDRs
0
Statistical discrepancy
-97.1
Balance on capital account
166.5
Carbaugh, Chap. 11
10
Balance of Payments
($ bill.)
US Balance of Payments 1970-97
100
50
0
Merchandise
trade balance
-50
Services
balance
-100
Current
account
balance
-150
-200
70 72 74 76 78 80 82 84 86 88 90 92 94 95 97
Carbaugh, Chap. 11
11
Balance of Payments
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
Carbaugh, Chap. 11
12