Chapter #13

balance of payment
Group members : faryal
Sana
Ayesha
Azka
Introduction

 The balance of payments provides a summary statement of

international transactions for a nation for a specified period of time.

 The main purpose of the balance of payments is to help the

government in formulation monetary, fiscal and trade policies.
 Millions of transactions of the residents of a nation with the rest of the
world cannot appear individually in the balance of payments .

 The balance of payment includes some transactions

 An international transaction refers to the exchange of a goods ,

services or asset ( for which payment is usually required ) between
the residents of one nation and the residents of other nations .

 Who is the resident of a nation ?

Balance of payments accounting

 We know examine how international transactions are recorded or

entered into the nations balance of payment

 the three main accounts of the balance of payments: the current

account, the capital account, and the financial account.
Current account and capital account

 Current account transactions include exports and imports of goods

and services, primary income received from and paid to foreign
residents, and secondary income sent and received from abroad.

 Capital account transactions refer to the disposal of nonproduced

nonfinancial assets and capital transfer receivable and payable from
abroad.
 The export of goods and services, as well as primary income,
secondary income, and capital transfers receivable from abroad are
classified as credit transactions

 The imports of goods and services, as well as primary income,

secondary income, and capital transfers payable to foreign residents
are classified as debit transactions.
 Net lending (+) from current and capital-account transactions
occurs when the total credits exceed the total debits in the nation's
current and capital accounts

 Net borrowing (-) from current and capital- account transactions

occurs when the total debits exceed the total credits in the nation's
current and capital accounts.
Financial account:

 Financial account involve three main components acquiring financial

assets , taking on foreign liabilities and dealing with financial
derivatives

Net acquisition of financial assets :

Buying various types of financial assets like :
1. Direct investment
2. Portfolio investment
3. Other investment
 Net incurrence of liabilities :
This means taking on debts or obligations from
foreign sources such as :
1. Direct and portfolio investment
2. Other liabilities
 Financial derivatives :
Value depends on other assets like stock and bonds
1. A country experience net lending (+) when it acquires
more financial assets than it incurs in liabilities

2. It experience net borrowing (-) when it incurs more

liabilities than it acquires in assets
Official reserve assets :
1. Gold holdings
2. Special drawing rights (SDRs)
3. Reserve position in the IMF
International transactions with
double – entry bookkeeping

Double- entry bookkeeping :

In recording a country’s international transactions we
use a method called double entry bookkeeping .
 This is because every transaction has two parts :
Selling something and receiving payment or buying something
and making payment .
Examples: ……….
 The sum of the current account and the capital account must equal
the financial account .

 The difference between total debits and credits in the current , capital
and financial accounts is recorded as a statistical discrepancy in the
nations balance of payments .
The International Transactions of the
United States

Table 13.1 presents a summary of the international transactions of the

United States for the year 2011. In the table, credits are entered with
positive signs and debits with negative signs. In a few instances, the
sum of the subtotals differs slightly from the total because of rounding.
 Table 13.1 shows that the United States exported $2,848 billion of
goods and services (including the income receipts on U.S. assets abroad)
in 2011. Goods exports of $1,497 billion included automobiles,
petroleum products, chemicals, agricultural food products, computers,
and electrical generating machinery (see Case Study 13-1). Service
exports of $606 billion included travel and transportation services
provided to foreigners, as well as fees and royalties received from
foreigners. U. S. residents also earned $745 billion in interest and
dividends on their foreign investments. Note that while a foreign
investment or financial outflow from the United States is recorded as a
debit under financial transactions (an increase in U.S.-owned assets
abroad), the earnings from the services of U.S. assets abroad (foreign
investments) are recorded here with the export of other services. The
income receipts on U.S. assets abroad are recorded separately from
other services because of their importance.
Accounting Balances and the U.S.
Balance of Payments

The bottom of Table 13.1 shows various balances. It shows that the
United States had an overall current account balance of (-)$449 billion in
2017. This means that the value of U.S. exports of goods and services,
and primary and secondary income receipts (credits) fell short of U.S.
imports of goods and services, and primary and secondary income
payments (debits) by $449 billion. This resulted from a deficit on trade in
goods and services of $552 billion (the sum of the deficit on trade in
goods of $807 billion and a surplus in trade in services of $255 billion) a
surplus on the balance of primary income of $222 billion, and a deficit
on the balance on secondary income of $119 billion.
The Postwar Balance of Payments of
the United States

 In this section, we present a brief balance-of-payments history of the

United States with the aid of Table 13.3. From Table 13.3, we see that
the U.S. positive trade balance on goods (column 4) of the 1960s
gave way to a negative trade balance on goods in the 1970s
 the first time in over 50 years), which became very large after 1982.
To a large extent, this reflected the sharp rise in the price of imported
petroleum products during the 1970s, the high international value of
the dollar in the 1980s, and the more rapid growth of the United
States than Europe and Japan during the 1990s and 2000s. Case
Study 13-2 gives the major trade partners of the United States and
the trade balance with each of them in 2011, while Case Studies 13-3
and 13-4 examine, respectively, the U.S.-Japan and the U.S.-China
trade deficits and trade during the past two-and-a-half or three
decades.
Introduction to Current Account

 A current account records a country's transactions with the rest of the

world in goods, services,income, and current transfers.
 The importance of the current account lies in its indication of a
nation's economic health.
 It reveals whether a country is a net lender or borrower.
 Consistent deficits or surpluses have significant economic
implications.
 Understanding the current account helps in formulating economic
policies.
Current Account Deficit in the U.S.

 The United States has experienced large current account deficits in

recent years.
 This is primarily due to higher imports compared to exports.
 The deficit has significant impacts on domestic jobs and industries.
 Continued deficits have led to heavy borrowing from other countries.
 The U.S. is currently the most indebted nation globally due to these
deficits.
Implications of Foreign Borrowing

 Not all foreign borrowing is inherently negative.

 Foreign investments can indicate global confidence in the U.S.
economy.
 Such investments can lead to job creation and economic growth.
 Borrowing is also essential when domestic savings are insufficient.
 It is crucial for financing government budget deficits and enhancing
investments.
Current Account as a Financial
Report Card

 A country's current account balance reflects its financial health.

 A deficit indicates borrowing from abroad to finance domestic needs.
 Both government and private sector borrowing contribute to the
deficit.
 Reductions in borrowing require cuts in budget deficit or increased
savings.
 Balancing this is challenging and involves making unpopular
economic decisions.
Reducing Current Account Deficits

 Reducing a current account deficit requires lowering public or private

sector borrowing.
 Cutting budget deficits involves either raising taxes or cutting spending.
 Both measures are often unpopular and challenging to implement.
 Increasing private savings involves reducing consumption.
 Lowering investment can slow down economic growth and job creation.
Global Implications of Current
Account Balances

 One country's deficit is another country's surplus in a global economy.

 Efforts to correct deficits should be matched by surplus countries
reducing their surpluses.
 This balanced approach helps stabilize the global economy.
 International cooperation is vital for global economic health.
 Chapter 18 will discuss these adjustment policies in greater detail.
Understanding Current Account
Surpluses

 A current account surplus indicates a country saves more than it

spends.
 This often leads to net foreign investment where the country lends
money globally.
 Surpluses can build strong international financial positions.
 However, excessive surpluses might contribute to global imbalances.
 Balancing surpluses and deficits is crucial for economic stability.
Balance of Payments vs.
International Investment Position

 Balance of payments tracks the flow of goods, services, and money

over a year.
 International investment position measures the total value of assets
abroad and foreign assets within the country.
 While balance of payments is about money flow, investment position
is about money stock.
 Both are essential for understanding a nation's economic standing.
 They provide insights into the financial relationships with the rest of
the world.
The Role of International Investment
Position

 It shows the distribution of a nation's assets abroad and foreign

assets domestically.
 A positive position indicates more assets abroad than foreign assets
within.
 A negative position signifies more foreign assets within than assets
abroad.
 Investment positions influence national economic strategies and
policies.
 Understanding this helps in assessing economic vulnerabilities and
strengths.
Conclusion and Future Outlook

 Current account balances and international investment positions are

crucial economic indicators.
 The U.5. must address its current account deficit through balanced
economic policies.
 Reducing deficits requires cooperation between deficit and surplus
countries.
 Future policies should focus on sustainable economic growth and
global stability.
 Ongoing analysis and adjustments will be essential for mitigating
economic risks.