CHAPTER 10

THE BALANCE OF PAYMENTS

CHAPTER OVERVIEW

In this chapter, we examine the monetary aspects of international trade by considering the nature and significance of
a nation’s balance of payments. The chapter begins by discussing the concept of the balance of payments. An
overview of double-entry accounting is provided and also an identification of the major credit and debit transactions
on the balance-of-payments statement.

Next we analyze the structure of the balance of payments by considering its current account and capital account.
The chapter emphasizes the linkage between a current-account deficit or surplus and the net foreign investment
position in national income accounting.

The chapter emphasizes the U.S. balance of payments and the U.S. balance of international indebtedness. Of
particular importance is the United States as a debtor nation and the views concerning the effects of U.S.
indebtedness.

After completing this chapter, the student should be able to:

• Define the balance of payments.
• Identify the credit and debit transactions on the balance of payments.
• Discuss the current account and the captial account of the balance of payments.
• Identify trends on the U.S. balance of payments.
• Describe the balance of international indebtedness.

BRIEF ANSWERS TO STUDY QUESTIONS

1. The balance of payments is a record of the monetary transactions between residents of one country and the
rest of the world that occur over the course of a one-year period.
2. The receipt of dollars from foreigners results from the following transactions: (1) merchandise exports, (2)
transportation-travel receipts, (3) income received from foreign investments abroad, (4) gifts received from
foreign residents, (5) aid received from foreign governments, and (6) investments in the U.S. by overseas
residents. The payment of dollars to foreigners would suggest the opposite for the above transactions.

3. Because the balance-of-payments statement utilizes a double-entry booking system, in which each credit
entry is balanced by a debit entry, the overall balance of payments must numerically balance.

4. Balance-of-payments transactions are grouped into two categories: (1) the current account which refers to
the monetary value of international flows associated with flows in goods, services, income, and unilateral
transfers; and (2) the capital account which includes all international purchases and sales of assets.

5. Official reserve assets consist of gold, Special Drawing Rights, reserve positions in the International Monetary
Fund, and convertible currencies.

6. A merchandise trade surplus suggests that the home country is a net exporter of merchandise. A goods and
services surplus suggests that the home country transfers more real resources (goods and services) to other
countries than it receives from them. A current account surplus means an excess of exports over imports of
goods, services, income, and unilateral transfers.
 7. If the surplus balance on the service account exceeds the deficit balance on the merchandise (goods)
account, the goods and services balance will be in surplus.

8. The balance of international indebtedness indicates the international investment position of a country at one
moment in time. The balance of payments indicates all of the international monetary transactions of a
country over a one-year period.

9. a-debit; b-credit; c-credit; d-debit; e-debit; f-debit; g-credit; h-debit; i-debit.

10. a. Merchandise trade balance, $75 billion deficit. Services balance, $60 billion surplus. Goods and
services balance, $15 billion deficit. Investment income balance, $5 billion surplus. Unilateral
transfers balance, $20 billion deficit. Current account balance, $30 billion deficit.
b. Current account. The current account deficit implies that the United States is a net-demander of
funds from the rest of the world.

11. Net debtor nation of the amount $25 billion.

2 Instructor's Manual