Download The Balance-of-Payments Accounts

Chapter 19
The Balance-ofPayments Accounts
McGraw-Hill/Irwin
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
19-1
Learning Objectives
• Explain what is meant by a country’s
“balance-of-payments” statement
and how it is constructed.
• Analyze the difference between
alternative accounting balances
within the balance-of-payments.
• Define the international investment
position of a country.
19-2
Balance-of-Payments
• Balance of payments accounts are a
way of keeping track of all economic
transactions between the home
country and the rest of the world over
a specific time period (usually one
year).
19-3
Recent Growth of Trade and
Capital Movements
• The value of trade in goods and
services has increased from $582
billion in 1973 to $15.8 trillion in 2008.
• International transactions of the
monetary sort have also grown very
rapidly over the last few decades.
19-4
Credit and Debits in Balanceof-Payments Accounting
• Credit items reflect transactions that
give rise to payments flowing into the
home country.
– e.g., exports, foreign investment inflows,
interest payments on earlier investments
• Debit items reflect transactions that
give rise to payments flowing out of
the home country.
– e.g., imports, foreign investment outflows,
interest payments to foreigners
19-5
Credit and Debits in Balanceof-Payments Accounting
• The IMF groups items into four
categories
– Category I: Current account,
– Category II: Direct investment and other
long-term financial flows,
– Category III: Short-term nonofficial
financial flows, and
– Category IV: Changes in reserve assets of
official monetary authorities (central
banks).
19-6
Credit and Debits in Balanceof-Payments Accounting
• Category I: Current account
– Credit items include exports of goods and
services, interest and dividends from
investments abroad, wages earned
abroad, and gifts from abroad.
– Debit items include imports of goods and
services, interest and dividends paid to
investors abroad, wages paid to
foreigners, and gifts sent abroad.
19-7
Credit and Debits in Balanceof-Payments Accounting
• Category II: Direct investment and
other long-term financial flows
– Credit entries: anything that causes a net
increase in the holdings of assets in the
home country by the foreign country.
– Debit entries: anything that causes a net
increase in the holdings of assets in a
foreign country by the home country.
19-8
Credit and Debits in Balanceof-Payments Accounting
• Category III: Short-term nonofficial
financial flows
– These are mainly private flows, with
maturities under one year.
– Credit items: any increase in foreign
holdings of such assets in the home
country.
– Debit items: any increase in home country
holdings of such assets in the foreign
country.
19-9
Credit and Debits in Balanceof-Payments Accounting
• Category IV: Changes in reserve
assets of official monetary authorities
(central banks)
– Credit items: whenever the foreign
country central bank acquires home
country assets (such as bank accounts).
– Debit items: whenever the home country
central bank acquires foreign country
assets.
19-10
Sample Entries in the
Balance-of-Payments
Accounts
• In general, balance-of-payments
accounting relies on double-entry
bookkeeping.
• This means that any transaction
must be added as a credit and a
debit.
• This implies that the sum of all
credits must equal the sum of all
debits, and the total BOP is always
in balance.
19-11
Sample Entries in the
Balance-of-Payments
Accounts
#1: Exporters in the U.S. send $6,000
of goods to Canada, receiving a
short-term bank deposit of $6,000
from Canada.
– Credit: Category I: Export of goods
+$6,000
– Debit: Category III: Increase in shortterm private assets abroad -$6,000
19-12
Sample Entries in the
Balance-of-Payments
Accounts
#2: Consumers in the U.S. buy
$10,000 of goods from Canada,
paying with a short-term bank
deposit of $10,000.
– Debit: Category I: Imports of goods
-$10,000
– Credit: Category III: Increase in foreign
short-term assets in the U.S. +$10,000
19-13
Sample Entries in the
Balance-of-Payments
Accounts
#3: U.S. residents send $5,000 to
Mexico as gifts.
– Credit: Category I: Exports of +$5,000
– Debit: Category I: unilateral transfer of
-$5,000
19-14
Sample Entries in the
Balance-of-Payments
Accounts
#4: An American firm provides $2,000
of shipping services to a Canadian
company, which pays by
transferring money into its U.S.
account.
– Credit: Category I: export of services
+$2,000
– Debit: Category III: Decrease in shortterm private assets in the U.S.: -$2,000
19-15
Sample Entries in the
Balance-of-Payments
Accounts
#5: A Canadian company sends
$8,000 in dividends to bank
accounts of American
stockholders.
– Credit: Category I: investment receipts
from abroad +$8,000
– Debit: Category III: Decrease in shortterm private assets in the U.S.: -$8,000
19-16
Sample Entries in the
Balance-of-Payments
Accounts
#6: An American buys a long-term
bond from a Mexican company for
$2,000; transfers payment from her
U.S. bank account.
– Debit: Category II: increase in longterm asset abroad -$2,000
– Credit: Category III: Increase in shortterm private assets in the U.S.: +$2,000
19-17
Sample Entries in the
Balance-of-Payments
Accounts
#7: Canadian banks wish to reduce
holdings of dollars in U.S. banks by
selling $800 to the Federal Reserve.
– Debit: Category III: Decrease in shortterm private assets in the U.S.: -$800
– Credit: Category IV: Increase in foreign
short-term official assets in the U.S.:
+$800
19-18
Assembling a BOP Summary
Statement
Debits
Credits
#1
Increase in short-term
private assets abroad
-$6,000
Exports of goods
+$6,000
#2
Imports of goods
-$10,000
Increase in foreign shortterm private assets in US
+$10,000
#3
Unilateral transfers
-$5,000
Exports of goods
+$5,000
#4
Decrease in foreign shortterm assets in U.S
-$2,000
Exports of services
+$2,000
#5
Decrease in foreign shortterm assets in U.S
-$8,000
Investment income from
abroad
+$8,000
#6
Increase in long-term assets -$2,000
abroad
Increase in foreign shortterm private assets in US
+$2,000
#7
Decrease in short-term
private assets in the U.S.:
Increase in foreign shortterm official assets
+$800
-$800
-$33,800
+$33,800
19-19
BOP Summary
Category
I
Exports of Goods
+$11,000
Imports of goods
-$10,000
Merchandise trade balance
+$1,000
Exports of services
+$2,000
Imports of services
-$0
Balance of goods and services
+$3,000
Factor income receipts from abroad
+$8,000
Factor income payments abroad
$0
Balance on goods, services, and investment income
+$11,000
Unilateral transfers received
+$0
Unilateral transfers made
-$5,000
CURRENT ACCOUNT BALANCE
+$6,000
19-20
Current Account Balance
Reflects sources and uses of national income
Y = C + I + G + (X – M)
X: not only exports but all credit items in the current
account
M: Not only imports but all debit items in the current
account
Y – (C + I + G) = (X – M)
If (X – M) < 0 → Country is spending more than its
income
If (X – M) > 0 → Country is spending less than its
income
19-21
Current Account Balance
Y=C+S+T
C + I + G + (X – M) = C + S + T
(X – M) = S + (T – G) – I
If (X – M) < 0 →country is saving less than it
invests
If (X – M) > 0 →country is saving more than it
invests
19-22
BOP Summary (cont’d)
Category
II
III
IV
Net increase in foreign long-term assets in U.S.
+$0
Net increase in long-term assets abroad
-$2,000
BASIC BALANCE
+$4,000
Net increase in foreign short-term private assets in U.S.
+$1,200
Net increase in short-term private assets abroad
-$6,000
OFFICIAL RESERVE TRANSACTIONS BALANCE
-$800
Net increase in foreign short-term official assets in U.S.
+$800
Net increase in official assets abroad
-$0
TOTAL
$0
19-23
Financial Account Balance
Category II
Category III
Category IV
Financial Account Balance
-$2,000
-$4,800
+ $800
-$6,000
19-24
Different Measures of Balance
•
•
•
•
•
Merchandise trade balance
Balance on goods and services
Balance on goods, services and factor income
Current account balance
Balance on currenct account and long term
assets
• Official reserve transactions balance
• Financial account balance
19-25
Statistical Discrepancy
• The current account balance may not
exactly equal the financial account
balance due to incomplete or imperfect
data, illegal activities, and mismatches
on the timing of data collection.
• To account for these, a category called
“statistical discrepancy” is included in
the BOP.
19-26
Balance of Payments - Monthly Analytic
Presentation (2011-2012 December)
19-27