CHAPTER T H I R T E E

CHAPTER T H I R T E E N 13 International Economics Tenth Edition Balance of Payments Dominick Salvatore John Wiley & Sons, Inc. Salvatore: International Economics, 11 th Edition © 2013 John Wiley & Sons, Inc.

Introduction n The balance of payments provides a summary statement of international transactions for a nation for a specified period of time. n An international transaction is the exchange of a good, service or asset between residents of one nation and residents of another nation. n The main purpose of the balance of payments is to help the government in formulation monetary, fiscal and trade policies. Salvatore: International Economics, 11 th Edition © 2013 John Wiley & Sons, Inc.

The International Transactions of the United States Salvatore: International Economics, 11 th Edition © 2013 John Wiley & Sons, Inc.

The International Transactions of the United States Salvatore: International Economics, 11 th Edition © 2013 John Wiley & Sons, Inc.

Accounting Balances and the Balance of Payments n Current Account n All sales and purchases of currently produced goods and services, investment incomes and unilateral transfers, providing link between international transactions and national income. n n Current account surplus stimulates domestic production and income Current account deficit dampens domestic production and income Salvatore: International Economics, 11 th Edition © 2013 John Wiley & Sons, Inc.

Accounting Balances and the Balance of Payments n Capital Account n Includes debt forgiveness and goods and financial assets that migrants take with them as they leave or enter the country. n The U. S. deficit in the current and capital accounts in 2007 are financed or covered by an equal net inflow of capital abroad. Salvatore: International Economics, 11 th Edition © 2013 John Wiley & Sons, Inc.

Accounting Balances and the Balance of Payments n Financial Account n Shows the change in U. S. -owned assets abroad and foreign-owned assets in the United States. n The U. S. covers its current and capital account deficits with an equal net financial account surplus. Salvatore: International Economics, 11 th Edition © 2013 John Wiley & Sons, Inc.

Accounting Balances and the Balance of Payments n If net private capital inflows do not cover the current and capital accounts deficit, the nation has a deficit in its balance of payments equal to the difference, which needs to be covered by a net credit balance on official (i. e. , monetary authorities’) reserve transactions. n n Official settlements balance - The balance on official reserve transactions, also called the balance of payments. Official reserve account – The account in which official reserve transactions are entered. Salvatore: International Economics, 11 th Edition © 2013 John Wiley & Sons, Inc.

Accounting Balances and the ex-ante Balance of Payments Current account balance + capital account balance + (‘spontaneous’) financial account balance (excluding official reserve transactions, but including net balance of financial derivatives) + statistical discrepancy ex-ante Balance of Payments Salvatore: International Economics, 11 th Edition © 2013 John Wiley & Sons, Inc.

n Ex-post BP is always ‘balanced’ or equal to zero. There is no meaning in analyzing it. n Ex-ante or spontaneous BP could be in balanced (=0), or imbalanced being in surplus (>0), or in deficit(<0). Salvatore: International Economics, 11 th Edition © 2013 John Wiley & Sons, Inc.

Accounting Balances and the ex-post Balance of Payments n Deficit in the ex-ante balance of payments (negative - covered ex-post by an equal amount official reserves transaction (reduction in international reserves of the nation or increase in foreign holdings of official assets of the nation). sum of account balances) n Surplus in ex-ante the balance of payments – settled ex-post by an increase in the nation’s international reserves and/or reduction in foreign official holdings of nation’s assets. (positive sum of account balances) Salvatore: International Economics, 11 th Edition © 2013 John Wiley & Sons, Inc.

The Postwar Balance of Payments of the United States n Points to keep in mind when examining balance of payments: 1. Too much attention is usually placed on balance of goods and short term data. n Dangerous to extrapolate for year based on quarterly data. Salvatore: International Economics, 11 th Edition © 2013 John Wiley & Sons, Inc.

The Postwar Balance of Payments of the United States n Points to keep in mind when examining balance of payments: 2. International transactions are closely interrelated rather than independent. n For example, cutting U. S. foreign aid programs also reduces ability of recipients to import U. S. goods, so improvement in U. S. balance of payments may be much less than reduction in aid. Salvatore: International Economics, 11 th Edition © 2013 John Wiley & Sons, Inc.

The Postwar Balance of Payments of the United States n Points to keep in mind when examining balance of payments: 3. An attempt to reduce the U. S. trade deficit with respect to a nation such as Japan is likely to reduce the U. S. surplus with respect to Brazil because Brazil pays for U. S. goods partly through natural resource exports to Japan. Salvatore: International Economics, 11 th Edition © 2013 John Wiley & Sons, Inc.

The Postwar Balance of Payments of the United States Salvatore: International Economics, 11 th Edition © 2013 John Wiley & Sons, Inc.

The Postwar Balance of Payments of the United States Salvatore: International Economics, 11 th Edition © 2013 John Wiley & Sons, Inc.

The International Investment Position of the United States Salvatore: International Economics, 11 th Edition © 2013 John Wiley & Sons, Inc.

The International Investment Position of the United States n A nation’s BOP measures international flow of goods, services and capital during a oneyear period (flow concept). n A nation’s international investment position measures total amount and distribution of assets abroad and foreign assets in the nation at the end of the year (stock concept). Salvatore: International Economics, 11 th Edition © 2013 John Wiley & Sons, Inc.

The International Investment Position of the United States n Also known as balance of international indebtedness. n Useful in projecting the future flow of income from U. S. foreign investments and payments on foreign investments in the U. S. Salvatore: International Economics, 11 th Edition © 2013 John Wiley & Sons, Inc.