Balance of Payment

BALANCE OF PAYMENT
3-1 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res
Balance of Payments Accounts
 The balance of payments accounts are those that
record all transactions between the residents of a
country and residents of all foreign nations.
 They are composed of the following:
 The Current Account

 The Capital Account
 The Official Reserves Account
 Statistical Discrepancy
The Current Account
 Includes all imports and exports of goods and
services.
 Includes unilateral transfers of foreign aid.
 If the debits exceed the credits, then a country is
running a trade deficit.

 If the credits exceed the debits, then a country is
running a trade surplus.
The Capital Account
 The capital account measures the difference
between sales of assets to foreigners and
purchases of foreign assets.
 The capital account is composed of Foreign Direct
Investment (FDI), portfolio investments and other

investments.
Statistical Discrepancy
 There’s going to be some omissions and
misrecorded transactions—so we use a “plug”
figure to get things to balance.
The Official Reserves Account
 Official reserves assets include gold, foreign
currencies, SDRs, reserve positions in the IMF.
The Balance of Payments Identity
BCA + BKA + BRA = 0
where
BCA = balance on current account
BKA = balance on capital account
BRA = balance on the reserves account
Under a pure flexible exchange rate regime,

BCA + BKA = 0
U.S. Balance of Payments Data
Credits Debits
Current Account
1 Exports $1,418.64
2 Imports ($1,809.18)
3 Unilateral Transfers $10.24 ($64.39)
Balance on Current Account ($444.69)
Capital Account
4 Direct Investment $287.68 ($152.44)
5 Portfolio Investment $474.39 ($124.94)
6 Other Investments $262.64 ($303.27)
Balance on Capital Account $444.26
7 Statistical Discrepancies 0.73
Overall Balance $0.30
Official Reserve Account ($0.30)
Credits Debits
Current Account In 2000, the
1 Exports $1,418.64
U.S. imported
2 Imports ($1,809.18)
more than it
Balance on Current Account ($444.69) exported, thus
Capital Account
running a
5 Portfolio Investment $474.39 ($124.94) current account
6 Other Investments
Balance on Capital Account
$262.64 ($303.27) deficit of
$444.26
7 Statistical Discrepancies 0.73 $444.69 billion.
Credits Debits During the same
Current Account
1 Exports $1,418.64
year, the U.S.
2 Imports ($1,809.18)
attracted net
3 Unilateral Transfers $10.24 ($64.39) investment of
Balance on Current Account ($444.69) $444.26 billion
Capital Account
—clearly the
5 Portfolio Investment $474.39 ($124.94) rest of the world
found the U.S.
7 Statistical Discrepancies 0.73 to be a good
place to invest.
3- Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res

Credits Debits
Current Account
1 Exports $1,418.64
Under a pure
2 Imports ($1,809.18)
flexible
3 Unilateral Transfers $10.24 ($64.39) exchange rate
Balance on Current Account ($444.69) regime, these
Capital Account
4 Direct Investment $287.68 ($152.44) numbers would
5 Portfolio Investment $474.39 ($124.94) balance each
other out.

Credits Debits
Current Account
1 Exports $1,418.64
In the real
2 Imports ($1,809.18)
world, there
3 Unilateral Transfers $10.24 ($64.39) is a statistical
Balance on Current Account ($444.69) discrepancy.
Capital Account

Credits Debits
Current Account
1 Exports $1,418.64
Including that,
2 Imports ($1,809.18)
the balance of
3 Unilateral Transfers $10.24 ($64.39) payments identity
Balance on Current Account ($444.69) should hold:
Capital Account
4 Direct Investment $287.68 ($152.44) BCA + BKA = – BRA
($444.69) + $444.26 + $0.73 = $0.30= –($0.30)
Balance of Payments and the
Exchange Rate
Credits Debits Exchange rate $
Current Account
1 Exports $1,418.64 P S
2 Imports ($1,809.18)
Capital Account
6 Other Investments $262.64 ($303.27) D
Overall Balance $0.30 Q

Exchange Rate
Current Account
1 Exports $1,418.64 P S
2 Imports ($1,809.18)
Capital Account
As U.S. citizens import, they are supply dollars to the FOREX market.
Exchange Rate
Current Account
1 Exports $1,418.64 P S
2 Imports ($1,809.18)
Capital Account
As U.S. citizens export, others demand dollars at the FOREX market.
Exchange Rate
Current Account
1 Exports $1,418.64 P S
2 Imports ($1,809.18) S1
Capital Account
As the U.S. government sells dollars, the supply of dollars increases.
Balance of Payments Trends
 Since 1982 the U.S. has experienced continuous
deficits on the current account and continuous
surpluses on the capital account.
 During the same period, Japan has experienced the
opposite.

Balances on the Current (BCA) and Capital
(BKA) Accounts of the United States
500
400
300
200
100
U.S. BCA
0
U.S. BKA
-1001982 1984 1986 1988 1990 1992 1994 1996 1998 2000
-200
-300
-400
-500
Source: IMF International Financial Statistics Yearbook, 2000

(BKA) Accounts of United Kingdom
40
30
20
10
0 UK BCA
-101982 1984 1986 1988 1990 1992 1994 1996 1998 2000 UK BKA
-20
-30
-40
-50

(BKA) Accounts of Japan
150
100
50
Japan BCA
0
Japan BKA
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
-50
-100
-150

(BKA) Accounts of Germany
80
60
40
20
Germany BCA
0
Germany BKA
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
-20
-40
-60
-80

(BKA) Accounts of China
35
30
25
20
15
China BCA
10
China BKA
5
0
-51982 1984 1986 1988 1990 1992 1994 1996 1998 2000
-10
-15

Balance of Payments Trends
 Germany traditionally had current account
surpluses.
 Since 1991 Germany has been experiencing
current account deficits.

 This is largely due to German reunification and
the resultant need to absorb more output

domestically to rebuild the former East Germany.
 What matters is the nature and causes of the
disequilibrium.
(BKA) Accounts of Five Major Countries
500 C h in a B C A
400 C h in a B K A
300
Ja p a n B CA
200
Ja p a n B K A
100
G ermany B CA
0
G ermany B KA
- 1 01 09 8 2 1 9 8 4 1 9 8 6 1 9 8 8 1 9 9 0 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0
UK BCA
-200
UK BKA
-300
-400 U .S . B C A
-500 U .S . B K A


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BALANCE OF PAYMENT

 The Current Account

 If the debits exceed the credits, then a country is

running a trade deficit.

running a trade surplus.

Investment (FDI), portfolio investments and other

Under a pure flexible exchange rate regime,

3- Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res

3- Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res

3- Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res

3- Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res

3- Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res

Source: IMF International Financial Statistics Yearbook, 2000

Source: IMF International Financial Statistics Yearbook, 2000

Source: IMF International Financial Statistics Yearbook, 2000

Source: IMF International Financial Statistics Yearbook, 2000

Source: IMF International Financial Statistics Yearbook, 2000

current account deficits.

the resultant need to absorb more output

Source: IMF International Financial Statistics Yearbook, 2000

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