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Balance-of-Payments
Accounts and Net
Financial Flows
Financial Inflow
• Balance of Payments is a flow account, which consists of the current
account and the capital and financial account
• A flow of capital, real and/or financial, into a country, takes the form
of increased purchases of domestic assets by foreigners and/or reduced
holdings of foreign assets by domestic residents. Inflows are recorded
as positive, or a credit, in the capital and financial account.
• Each country also has an international balance sheet, which is a stock
account which shows assets and liabilities abroad and foreign assets
and liabilities at home -- Called the international investment positions
accounts in the U.S. (the accumulated stocks of U.S.-owned assets
abroad and of foreign-owned assets in the United States) .
• The net change in the international investment positions accounts from
the beginning of one year to the end of the next is the net
capital/financial flow for the year
Economic Summits
Fred Thompson
2
Exchange and Net Flows
• Exchange of Real Assets – exchange of goods and
services for other goods and services or for financial
claims (will give rise to a net change in financial claims if
x≠m)
• Exchange of Financial Assets – Exchange of financial
claims for other financial claims (net financial claims are
unchanged)
• Hence, m-x = net capital flow, also = I-S
[ignoring reporting errors and official settlements]
Economic Summits
Fred Thompson
3
Balance of Payments Statistics for the
United States, 1966
(Amounts in millions of dollars)
Sources of Foreign Exchange
Uses of Foreign Exchange
• Exports of Goods and Services $43,142 • Imports of Goods and Services $38,063
• Remittances and Pensions $1,015
Balance on goods, services, remittances,
and pensions +$4065
•
Foreign Capital Flow, net $2,532
•
•
•
U.S. Government grants, net $3,444
U.S. private Capital Flow, net $4,298
Errors and Omissions $210
Balance of all of the above -$1357
•
•
Change in U.S. Reserve Assets $568
Change in Liquid Liabilities of Foreign
Accounts $789
.
Source: Federal Reserve Bulletin, April 1969, pp A70-71
Economic Summits
Fred Thompson
4
The Balance of Payments
Accounting System
International Bookkeeping
International Transactions
Accounts (Balance of Payments)
A quarterly statistical summary of transactions
between U.S. and foreign residents
organized into three major categories:
– The current account
– The capital account
– The financial account
Economic Summits
Fred Thompson
6
Balance of Payments
• System of accounts which is a subset of the
National Income and Production Accounts
– A double-entry bookkeeping system.
– Debit Entries: Transactions that generate a
payment outflow (e.g., import).
– Credit Entries: Transactions that generate a
payment inflow (e.g., export).
Economic Summits
Fred Thompson
7
Balance of Payments
• The current account includes exports and
imports of goods, services, income, and
current transfers.
–
–
–
–
Goods
Services
Income Receipts and Payments
Unilateral Transfers
Economic Summits
Fred Thompson
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Balance of Payments
• Goods: Exports and imports of tangible
items.
• Services: Exports and imports of services,
for example:
– Typical business services such as banking and
financial services, insurance, and consulting.
– Tourism
Economic Summits
Fred Thompson
9
Balance of Payments
• Income Receipts: Includes items such as
– Investment income on US-owned assets abroad.
– Receipts of income on US direct investment
abroad.
– Government income receipts
Economic Summits
Fred Thompson
10
Balance of Payments
• Income Payments: Includes items such as
– Investment income on foreign-owned assets in
the United States.
– Payments of income on foreign direct
investment in the United States
– US Government income payments
Economic Summits
Fred Thompson
11
Balance of Payments
• Unilateral Transfers: Includes items such
as:
– Government grants abroad
– Private remittances
– Private grants abroad
Economic Summits
Fred Thompson
12
Balance of Payments (2000)
Exports
Millions
Goods
Services
Income Receipts
Imports
Goods
Services
Income Payments
Unilateral Transfers
Current Account Balance
Economic Summits
Fred Thompson
1,414,925
773,304
296,227
345,394
-1,797,061
-1,222,772
-215,239
-359,050
-53,241
-435,377
13
Balance of Payments
The Financial Sector
• In June 1999, US capital account definitions were
modified to bring them more in line with
definitions recommended by the International
Monetary Fund.
• Now there are two accounts:
– The capital account includes capital transfers, such as
debt forgiveness.
– The financial account includes transactions for official
assets, for U.S. Government assets other than official
reserve assets, for direct investment, for portfolio
investment, and for other investment.
Economic Summits
Fred Thompson
14
Balance of Payments
The Financial Sector
• The new Capital Account includes items
that were previously included in unilateral
transfers, such as:
– Debt forgiveness
– Migrants’ transfers (as they leave the country).
• The new capital account is small for the US
(< 0.1 percent of capital flows), but
expected to grow.
Economic Summits
Fred Thompson
15
Balance of Payments
The Financial Sector
• The Financial Account
– Records international transactions in the
financial sector
– Includes portfolio and foreign direct investment
– Includes changes in banks’ and brokers’ cash
deposits that arise from international
transactions.
Economic Summits
Fred Thompson
16
Balance of Payments
The Financial Sector
• US-Owned Assets Abroad: Increase or
decrease in US ownership of foreign
financial assets.
• Foreign-Owned Assets in the US: Increase
or decrease in foreign ownership of
domestic assets.
• Reserve Assets: Primarily the assets of
central banks.
Economic Summits
Fred Thompson
17
Balance of Payments
The Financial Sector
• Portfolio Investment: Individual or
business purchase of stocks, bond, or other
financial assets or deposits. (An income
strategy)
• Foreign Direct Investment: Purchase of
financial assets that results in a 10 percent
or greater ownership share. (A financial
control strategy)
Economic Summits
Fred Thompson
18
Capital and Financial Account
(2000)
Capital Account, Net
Financial Account
US-Owned Assets
Abroad
680
-553,349
US Official Reserve Assets
US Government Assets
US Private Assets
Foreign-Owned Assets
Foreign Official Assets
Other Foreign Assets
Net Financial Flows
Economic Summits
-290
-715
-552,344
952,430
35,909
916,521
399,761
Fred Thompson
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The Balance of Payments
The Statistical Discrepancy
Balance on Current Account
Capital Account, net
680
Net Financial Flows
399,081
Statistical Discrepancy
Economic Summits
-435,377
Fred Thompson
35,616
20
International Allocation of
Capital
Feldstein - Horioka
• Savings and Investment Relation
• Based on a closed economy income
condition:
y = c + i + g.
• Rearrange as:
y - c - g = i.
Economic Summits
Fred Thompson
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Feldstein - Horioka
• Rearranged as:
y - c - g = i.
• Note that y - c - g equals savings, s. Then:
s = i.
• In a closed economy, domestic investment is equal to
domestic saving by definition, but is also correlated in
practice, i.e., correlation coefficient is necessarily
close to 1 in value.
Economic Summits
Fred Thompson
23
International Flow of Goods,
Services, & Capital
• Domestic Savings and Investment & NFF
National Income (GNY) = Consumption (C) +
Savings (S)
National Spending (GNE) = Consumption (C) +
Investment (I)
GNY - GNE = S - I
GNY - GNE = Exports (x) - Imports (m)
S-I=x-m
Net Foreign Investment = x - m
Economic Summits
Fred Thompson
24
Government Budget Deficits and
NFF
GNE = Household spending + Private I +
Government spending
= GNY - Private S - Taxes + Private I
+ Government spending
GNE - GNY = Private (I - S) +
GovDeficit/Surplus
NFF = Private savings surplus - GovDeficit
Economic Summits
Fred Thompson
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US Balance of Payments
U.S. TRADE AND CURRENT ACCOUNT BALANCES
EXPRESSED AS A PERCENTAGE OF GDP
4%
2%
0%
C/A
TB
-2%
-4%
-6%
46
50
54
58
Economic Summits
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66
70
74
78
82
Fred Thompson
86
90
94
98
2
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Basic Premise
A current account deficit must be financed by
capital inflows, or it cannot be incurred in the
first place
FACT
Over 1982-2003, U.S. current
account deficits have averaged
$183 billion per year.
$4 trillion worth of assets have
been transferred to foreign
ownership.
Trade and Scale Variables I
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Economic Summits
Fred Thompson
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Scale Variables I
U.S. monthly GDP: $1 trillion
• Monthly goods and services exports: $130
billion = 13%
• Monthly goods and services imports: $185
billion = 18.5%
• Balancing item: net capital flow: $55 billion
= 5.5%
Economic Summits
Fred Thompson
31
Scale Variables II
U.S. GDP per worker: $84,000 per year
• Exports of $10,900 per year
• Imports of $15,500 per year
Economic Summits
Fred Thompson
32
Result:
Foreign claims on U.S. assets
now exceed U.S. claims on
foreign assets by about $2.7
trillion.
–Storing up purchasing power for the future
–Private political risk insurance
–Public political risk insurance
International Investments
(market value, end-2003)
U.S. foreign investments:
Foreign investments in U.S.:
Net:
$7.9 trn
$10.5 trn
-$2.7 trn
Much of this capital inflow has been portfolio
investment.
Some has been direct investment.
Foreign Direct Investment
(market value, end-2003)
U.S. DI abroad:
Foreign DI in U.S.:
Net:
$2.7 trillion
$2.4 trillion
$0.3 trillion
Direct Investment Positions
At current market value, $ trillion
3.0
2.5
2.0
1.5
U.S. Direct Investment Abroad
1.0
0.5
Foreign Direct Investment in U.S.
02
00
Fred Thompson
98
96
94
92
Economic Summits
90
88
86
84
0.0
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US f o re ign dire c t inv e s t m e nt , 2 0 0 1
Asia,Pacif ic
Ot her
11%
2%
Japan
U.K.
18%
5%
Caribbean
8%
L.America
12%
Europe
Canada
34%
10%
Economic Summits
Fred Thompson
37
Foreign direct investment in US, 2001
Japan
Other
12%
5%
Caribbean
3%
UK
16%
Canada
8%
other
Europe
56%
Economic Summits
Fred Thompson
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