International Economics

Li Yumei
Economics & Management School
of Southwest University

International Economics

Chapter 13
Balance of Payments

Organization

13.1 Introduction
13.2 Balance of Payments Accounting Principles
13.3 The International Transactions of the United
States
13.4 Accounting Balances and Disequilibrium in
International Transactions
13.5 The Postwar Balance of Payments of the
United States
13.6 The International Investment Position of the
United States
Chapter Summary
Exercises
Internet Materials

13.1 Introduction

The Balance of Payments

Concept

It 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.

Function

to inform the government of the international position of the nation; to

help it in its formulation of monetary, fiscal, and trade policies; to
consult the balance of payments of important trade partners in
making policy decisions; to inform the banks, firms and individuals
directly or indirectly involved in international trade and finance

Explanation

Summary statement: aggregation not individual for the nation

International transaction: the exchange of goods, services or

asset between the residents of one nation and the residents of
other nations

Residents: holding citizenship

Time dimension: one calendar year

13.2 Balance of Payments

Accounting Principles

Credits( ) and Debits ( )

Credit

They are those that involve the receipt of payments from

foreigners. Credit transactions are entered with a positive
sign(+).( )

Debit

They are those that involve the payments to foreigners. Debit

transactions are entered with a negative sign (-).( )

Explanation

Credits (+) transactions (receipt of payments from

foreigners) : Export of goods and services, unilateral transfers
(gifts) received from foreigners and capital inflows are credits(+)

Debits (-) transactions (payments to foreigners) : Import of

goods and services, unilateral transfers (gifts) made to
foreigners and capital outflows are debits (-)

Capital inflows: It can take the form of either an increase in

foreign assets (purchase foreign stocks) in the nation or a
reduction (sell foreign stocks) in the nations assets abroad

Capital outflows: It can take the form of either an increase in

the nations foreign assets (purchase foreign stocks) abroad or
a reduction (sell foreign stocks) in the nations assets abroad

Double-Entry Bookkeeping

Concept

It means that each international transaction is recorded twice,

once as a credit and once a debit of an equal amount. This is
because in general every transaction has two sides. Total
debits equal total credits.

Examples

Textbook: page from 432-433

Problems

Textbook: 1-8 page 449-450

13.3 The International Transactions

of the United States

Case Study 13-1(page 435)
The major Goods Exports and Imports of the
United States
Exports of goods, services, and income
Imports of goods, services, and income
Unilateral transfer, net
US-Owned assets abroad
Foreign-owned assets in the US, net
Allocation of special drawing rights
Statistical discrepancy

13.4 Accounting Balances and

Disequilibrium in International
Transactions

Current Account & Capital Account

Current Account

The Account that includes all sales and purchases of currently

produced goods and services, income on foreign investments,
and unilateral transfer

Capital Account

The change in the nations assets abroad and foreign assets in

the nation , other than official reserve assets

 Autonomous Transactions &

Accommodating Transactions
Autonomous Transactions
International transactions that take place for business or
profit motives (except for unilateral transfers) and independently
of balance-of-payments considerations; also called abovetheline-terms.

Accommodating transactions
Transactions in official reserve assets required to balance
international transactions; also called below-the-line items.

Deficit & Surplus in the Balance

of Payment
Deficit in the Balance of Payment
The excess of debits over credits; equal to the net credit balance
in the official reserve account, or accommodating transactions.

Surplus in the Balance of Payment

The excess of credits over debits in the current and capital
accounts, or autonomous transactions; equal to the net debit
balance in the official reserve account, or accommodating
transactions.

13.5 The Postwar Balance of

Payments of the United States

Current Account

Positive trade balance on goods of the 1960s and

negative trade balance in 1970s, very large after 1982

Official Reserve Balance

First large balance deficit in 1970, in 1996 all-time-highbalance of-payments deficit (positive official settlements
represents a deficit in international transactions, while
negative balance represents a surplus

 Case Studies of U.S. Balance

with its major trading partners

Case 1: The U.S. Trade Deficit with Japan

FIGURE131TheU.S.TradeBalancewithJapaninGoodsandinGoodsand
Services,19802001.

 Case Studies of U.S. Balance with

its major trading partners

Case 2: The U.S. Trade Deficit with China

FIGURE132U.S.Exports,Imports,andNetTradeBalanceinGoodswith
China,19852001(billionsofdollars).

13.6 The International Investment

Position o f the United States

Concept of International Investment

Position

It measures the total amount and the distribution of a

nations 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 (

It can be used to project the future flow of income or

earnings from the nations foreign investments and the
flow of payments on foreign investments in the nation.

 USA International Investment Position

Two different measures: one the values foreign direct

investments at current costs, the other the values foreign
direct investments at market prices
Net international investment position with foreign direct
investment measured at current cost, deteriorated sharply
from 1980 to 1985, 1990, 1995, at the end of 2001 (see page
445 table 13.5)
U.S.,-owned assets abroad increased 6.6 times form 1980 to
2001
Conclusion: net debtor nation between 1985 and 1990; rapid
rise in foreign holdings of U.S. securities and bank claims
resulted primarily from higher interest rates and greater
political stability in U.S. than abroad and half of federal budget
deficit during the mid-1980s

Chapter Summary

Concept of the balance of payments

International transactions: credit or debit
transactions
Accounting balances and Disequilibrium in
international transactions
U.S. balance of payments and with its major trading
partners
International investment position, or balance of
indebtedness, measures the total amount an
distribution of a nations assets abroad and foreign
assets in the nation at year end

Exercises: Additional Reading

U.S.- China trade problem, see:

Federal Reserve Bank of New York, The Growing U.S.

Trade Imbalance with China, Current Issues in Economics
and Finance (New York, Mary 1997)

U.S.- Japan trade problems, see:

D.Salvatore, The Japanese Trade Challenge and the U.S.

response (Washington, D.C.: Economic Policy Institute,
1990)
L.DAndrea Tyson, Whos Bashing Whom? Trade Conflict
in High-Technology Industries (Washington, D.C.: Institute
for International Economics, 1992)

Internet Materials
http://www.bea.doc.gov by clicking
international data
http://webhost.bridgew.edu.baten
http://www.bea.doc.gov/bea/pubs.html
http://w3.access.gpo.gov/usbudget/fy2003/pd
f/2002-erp.pdf
http://www.unctad.org/en/docs/wir99ove.pdf
http://www.oecd.org