The Balance of Payments

We have all heard of the balance of payments. Unfortunately, common usage does not allow us to discuss the balance of payments because there are several ways to measure the balance, and the press often blurs the distinctions among these various measures. In general, the balance of payments records a country’s trade in goods, services, and financial assets with the rest of the world. Such trade is divided into useful categories that pro- vide summaries of a nation’s trade. A distinction is made between private (individuals and business firms) and official (government) transactions. Balance of payments data are reported quarterly for most developed countries. Figure 3.1 presents the balance of payments as reported by the U.S. Department of Commerce. This rather imposing document is of great use to economists, but it provides more detail than we need be concerned with here. To identify the popular summary measures of the balance of payments, we are interested only in broad definitions. We must

be aware that although the several broad measures have their uses, they also have drawbacks, as will be pointed out in the following discussion. The balance of payments is an accounting statement based on double- entry bookkeeping. Every transaction is entered on both sides of the balance sheet, as a credit and as a debit. Credit entries are those entries that will bring foreign exchange into the country, whereas debit entries record items that would mean a loss of foreign exchange. In Figure 3.1 , debit entries are recorded as a negative value. For instance, suppose we record the sale of a machine from a U.S. manufacturer to a French importer and the manufacturer allows the buyer 90 days credit to pay. The machinery export is recorded as a credit in the merchandise account, whereas the credit extended to the foreigner is a debit to the capital

(Credits +; debits -) Line

Current account

1 Exports of goods and services and income receipts

2 Exports of goods and services

1072782 1837577 3 Goods, balance of payments basis

288002 548878 5 Transfers under U.S. military agency sales contracts

82891 103505 7 Passenger fares

20197 30931 8 Other transportation

25562 39936 9 Royalties and license fees

51808 105583 10 Other private services

100792 250320 11 U.S. goverment miscellaneous services

542 1121 12 Income receipts

352478 663240 13 Income receipts on U.S. -owned assets abroad

348083 657963 14 Direct investment receipts

151839 432000 15 Other private receipts

192398 224469 16 U.S. government receipts

3846 1494 17 Compensation of employees

18 Imports of goods and services and income payments

19 Imports of goods and services

–1449532 –2337604 20 Goods, balance of payments basis

–218964 –403048 22 Direct defense expenditures

–65366 –75507 24 Passenger fares

–23613 –27279 25 Other transportation

–37209 –51202 26 Royalties and license fees

–16606 –33450 27 Other private services

–61085 –180598 28 U.S. government miscellaneous services

–2386 –4621 29 Income payments

–333300 –498016 30 Income payments on foreign-owned assets in the United States

–322345 –483504 31 Direct investment payments

–56910 –151361 32 Other private payments

–180918 –196004 33 U.S. government payments

–84517 –136139 34 Compensation of employees

35 Unilateral current transfers, net

–16836 –44717 37 U.S. government pensions and other transfers

36 U.S. government grants

–4705 –10365 38 Private remittances and other transfers

Figure 3.1 U.S. international transactions. Source: Bureau of Economic Analysis; U.S. International Transactions Accounts Data, September 2011. Note that the financial derivatives have been removed affecting the capital account balance in 2010.

Capital account 39 U.S.-owned assets abroad, excluding financial derivatives

40 U.S. official reserve assets

0 0 42 Special drawing rights

–722 –31 43 Reserve position in the International Monetary Fund

2308 –1293 44 Foreign currencies

–2697 –1876 –510 45 U.S. government assets, other than official reserve assets

–941 7540 46 U.S. credits and other long-term assets

–8410 –5182 –4976 47 Repayments on U.S. credits and other long-term assets

10856 4265 2408 48 U.S. foreign currency holdings and U.S. short-term assets

–24 10108 49 U.S. private assets

–559292 –1010888 50 Direct investment

–159212 –351350 51 Foreign securities

–127908 –151916 52 U.S. claims on unaffiliated foreigners reported by U.S. nonbanking concerns

–138790 7421 53 U.S. claims reported by U.S. banks and securities brokers

54 Foreign-owned assets in the United States, excluding financial

55 Foreign official assets in the United States

33910 42758 349754 56 U.S. government securities

30243 35710 316980 57 U.S. Treasury securities

40909 –80817 59 Other U.S. government liabilities

–1825 12124 60 U.S. liabilities reported by U.S. banks and securities brokers

5746 –9375 61 Other foreign official assets

–1586 3127 30025 62 Other foreign assets in theUnited States

995466 895982 63 Direct investment

48494 321274 236226 64 U.S. Treasury securities

–2534 –69983 256428 65 U.S. Securities other than U.S. Treasury securities

459889 120453 66 U.S. currency

16586 –3357 28319 67 U.S. liabilities to unaffiliated foreigners reported by U.S. nonbanking concerns

45133 170672 77456 68 U.S. liabilities reported by U.S. banks and securities brokers

69 Statistical discrepancy (sum of above items with sign reversed)

70 Balance on goods (lines 3 and 20)

–445787 –645857 71 Balance on services (lines 4 and 21)

30173 69038 145830 72 Balance on current account (lines 1, 18, and 35)

Figure 3.1 ( Continued)

62 International Money and Finance

surplus or deficit can apply only to a particular area of the balance of payments, since the sum of the credits and debits on all accounts will always be equal; in other words, the balance of payments always balances. This will become apparent in the following discussion. Let us consider some of the popular summary measures of the balance of payments.

The Balance of Payments