The Balance of Payments

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 Balance of Payments Accounting
 The Balance of Payments is the statistical record
of a country’s international transactions over a
certain period of time presented in the form of
double-entry bookkeeping.

N.B. when we say “a country’s balance of

payments” we are referring to the transactions of
its citizens and government.

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 Balance of Payments Example
 Suppose that Maplewood Bicycle in
Maplewood, Missouri, USA imports
$100,000 worth of bicycle frames from
Mercian Bicycles in Darby England.
 There will exist a $100,000 credit recorded
by Mercian that offsets a $100,000 debit at
Maplewood’s bank account.
 This will lead to a rise in the supply of
dollars and the demand for British pounds.

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 Balance of Payments Accounts
 The balance of payments accounts are those that
record all transactions between the residents of a
country and residents of all foreign nations.
 They are composed of the following:
 The Current Account
 The Capital Account
 The Official Reserves Account
 Statistical Discrepancy

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 The Current Account
 Includes all imports and exports of goods and
services.
 Includes unilateral transfers of foreign aid.
 If the debits exceed the credits, then a country is
running a trade deficit.
 If the credits exceed the debits, then a country is
running a trade surplus.

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 The Capital Account
 The capital account measures the difference
between U.S. sales of assets to foreigners and U.S.
purchases of foreign assets.
 In 2004, the U.S. enjoyed a $611.2 billion capital
account surplus—absent of U.S. borrowing from
foreigners, this “finances” our trade deficit.
 The capital account is composed of Foreign Direct
Investment (FDI), portfolio investments and other
investments.
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 Statistical Discrepancy
 There’s going to be some omissions and
misrecorded transactions—so we use a “plug”
figure to get things to balance.
 Exhibit 3.1 shows a discrepancy of $51.9 billion
in 2004.

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 The Official Reserves Account
 Official reserves assets include gold, foreign
currencies, SDRs, reserve positions in the IMF.

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 The Balance of Payments Identity
BCA + BKA + BRA = 0
where
BCA = balance on current account
BKA = balance on capital account
BRA = balance on the reserves account

Under a pure flexible exchange rate regime,

BCA + BKA = 0
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 U.S. Balance of Payments Data
Credits Debits
Current Account
1 Exports $1,516.2
2 Imports ($2,109.1)
3 Unilateral Transfers $16.4 ($89.4)
Balance on Current Account ($665.9)
Capital Account
4 Direct Investment $115.5 ($248.5)
5 Portfolio Investment $794.4 ($90.8)
6 Other Investments $524.3 ($483.7)
Balance on Capital Account $611.2
7 Statistical Discrepancies 51.9
Overall Balance $2.8
Official Reserve Account $2.8

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 U.S. Balance of Payments Data
Credits Debits
Current Account In 2004, the
1 Exports $1,516.2
U.S. imported
2 Imports ($2,109.1)
3 Unilateral Transfers $16.4 ($89.4)
more than it
Balance on Current Account ($665.9) exported, thus
Capital Account
running a
4 Direct Investment $115.5 ($248.5)
5 Portfolio Investment $794.4 ($90.8) current account
6 Other Investments
Balance on Capital Account
$524.3 ($483.7) deficit of
$611.2
7 Statistical Discrepancies 51.9 $665.9 billion.
Overall Balance $2.8
Official Reserve Account $2.8

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 U.S. Balance of Payments Data
Credits Debits During the same
Current Account
1 Exports $1,516.2
year, the U.S.
2 Imports ($2,109.1)
attracted net
3 Unilateral Transfers $16.4 ($89.4) investment of
Balance on Current Account ($665.9) $611.2 billion—
Capital Account
4 Direct Investment $115.5 ($248.5)
clearly the rest
5 Portfolio Investment $794.4 ($90.8) of the world
6 Other Investments $524.3 ($483.7)
Balance on Capital Account $611.2
found the U.S.
7 Statistical Discrepancies 51.9 to be a good
Overall Balance $2.8
Official Reserve Account $2.8
place to invest.

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 U.S. Balance of Payments Data
Credits Debits
Current Account
1 Exports $1,516.2
Under a pure
2 Imports ($2,109.1)
flexible
3 Unilateral Transfers $16.4 ($89.4) exchange rate
Balance on Current Account ($665.9) regime, these
Capital Account
4 Direct Investment $115.5 ($248.5) numbers would
5 Portfolio Investment $794.4 ($90.8) balance each
6 Other Investments $524.3 ($483.7)
Balance on Capital Account $611.2
other out.
7 Statistical Discrepancies 51.9
Overall Balance $2.8
Official Reserve Account $2.8

3-13 Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
 U.S. Balance of Payments Data
Credits Debits
Current Account
1 Exports $1,516.2
In the real
2 Imports ($2,109.1)
world, there
3 Unilateral Transfers $16.4 ($89.4) is a statistical
Balance on Current Account ($665.9) discrepancy.
Capital Account
4 Direct Investment $115.5 ($248.5)
5 Portfolio Investment $794.4 ($90.8)
6 Other Investments $524.3 ($483.7)
Balance on Capital Account $611.2
7 Statistical Discrepancies 51.9
Overall Balance $2.8
Official Reserve Account $2.8

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 U.S. Balance of Payments Data
Credits Debits
Current Account
1 Exports $1,516.2
Including that,
2 Imports ($2,109.1)
the balance of
3 Unilateral Transfers $16.4 ($89.4) payments identity
Balance on Current Account ($665.9) should hold:
Capital Account
4 Direct Investment $115.5 ($248.5) BCA + BKA = – BRA
5 Portfolio Investment $794.4 ($90.8)
6 Other Investments $524.3 ($483.7)
Balance on Capital Account $611.2
7 Statistical Discrepancies 51.9
Overall Balance $2.8
Official Reserve Account $2.8
($665.9) + $611.2 + $51.9 = ($2.8)
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