BALANCE OF PAYMENT

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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

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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.

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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.

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Statistical Discrepancy

There’s going to be some omissions and misrecorded transactions—so we use a “plug” figure to get things to balance.

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The Official Reserves Account

Official reserves assets include gold, foreign currencies, SDRs, reserve positions in the IMF.

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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
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U.S. Balance of Payments Data
Credits Current Account 1 2 3 Exports Imports $10.24 $1,418.64 ($1,809.18) ($64.39) ($444.69) ($152.44) ($124.94) ($303.27) Debits

Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account

Statistical Discrepancies Overall Balance Official Reserve Account
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$287.68 $474.39 $262.64 $444.26 0.73 $0.30

($0.30)

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

U.S. Balance of Payments Data
Credits Current Account 1 2 3 Exports Imports $10.24 $1,418.64 ($1,809.18) ($64.39) ($444.69) ($152.44) ($124.94) ($303.27) Debits

Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account

Statistical Discrepancies Overall Balance Official Reserve Account
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$287.68 $474.39 $262.64 $444.26 0.73 $0.30

In 2000, the U.S. imported more than it exported, thus running a current account deficit of $444.69 billion.

($0.30)

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

U.S. Balance of Payments Data
Credits Current Account 1 2 3 Exports Imports $10.24 $1,418.64 ($1,809.18) ($64.39) ($444.69) ($152.44) ($124.94) ($303.27) Debits

Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account

Statistical Discrepancies Overall Balance Official Reserve Account
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$287.68 $474.39 $262.64 $444.26 0.73 $0.30

($0.30)

During the same year, the U.S. attracted net investment of $444.26 billion —clearly the rest of the world found the U.S. to be a good place to invest.

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

U.S. Balance of Payments Data
Credits Current Account 1 2 3 Exports Imports $10.24 $1,418.64 ($1,809.18) ($64.39) ($444.69) ($152.44) ($124.94) ($303.27) Debits

Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account

Statistical Discrepancies Overall Balance Official Reserve Account
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$287.68 $474.39 $262.64 $444.26 0.73 $0.30

Under a pure flexible exchange rate regime, these numbers would balance each other out.

($0.30)

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

U.S. Balance of Payments Data
Credits Current Account 1 2 3 Exports Imports $10.24 $1,418.64 ($1,809.18) ($64.39) ($444.69) ($152.44) ($124.94) ($303.27) Debits

Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account

In the real world, there is a statistical discrepancy.

Statistical Discrepancies Overall Balance Official Reserve Account
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$287.68 $474.39 $262.64 $444.26 0.73 $0.30

($0.30)

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

U.S. Balance of Payments Data
Credits Current Account 1 2 3 Exports Imports $10.24 $1,418.64 ($1,809.18) ($64.39) ($444.69) ($152.44) ($124.94) ($303.27) Debits

Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account

Including that, the balance of payments identity should hold:
BCA + BKA = – BRA

Statistical Discrepancies Overall Balance Official Reserve Account
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$287.68 $474.39 $262.64 $444.26 0.73 $0.30

($0.30)

($444.69) + $444.26 + $0.73 = $0.30= –($0.30)

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

Balance of Payments and the Exchange Rate
Credits Current Account 1 2 3 Exports Imports $10.24 $1,418.64 ($1,809.18) ($64.39) ($444.69) ($152.44) ($124.94) ($303.27) Debits

Exchange rate $ P S

Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account

Statistical Discrepancies Overall Balance Official Reserve Account
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$287.68 $474.39 $262.64 $444.26 0.73 $0.30

D Q

($0.30)

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

Balance of Payments and the Exchange Rate
Credits Current Account 1 2 3 Exports Imports $10.24 $1,418.64 ($1,809.18) ($64.39) ($444.69) ($152.44) ($124.94) ($303.27) Debits

Exchange rate $ P S

Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account

Statistical Discrepancies Overall Balance Official Reserve Account
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$287.68 $474.39 $262.64 $444.26 0.73 $0.30

D Q

($0.30)

As U.S. citizens import, they are supply dollars to the FOREX market.

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

Balance of Payments and the Exchange Rate
Credits Current Account 1 2 3 Exports Imports $10.24 $1,418.64 ($1,809.18) ($64.39) ($444.69) ($152.44) ($124.94) ($303.27) Debits

Exchange rate $ P S

Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account

Statistical Discrepancies Overall Balance Official Reserve Account
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$287.68 $474.39 $262.64 $444.26 0.73 $0.30

D Q

($0.30)

As U.S. citizens export, others demand dollars at the FOREX market.

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

Balance of Payments and the Exchange Rate
Credits Current Account 1 2 3 Exports Imports $10.24 $1,418.64 ($1,809.18) ($64.39) ($444.69) ($152.44) ($124.94) ($303.27) Debits

Exchange rate $ P S S1

Unilateral Transfers Balance on Current Account Capital Account 4 5 6 7 Direct Investment Portfolio Investment Other Investments Balance on Capital Account

Statistical Discrepancies Overall Balance Official Reserve Account
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$287.68 $474.39 $262.64 $444.26 0.73 $0.30

D Q

($0.30)

As the U.S. government sells dollars, the supply of dollars increases.

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

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.

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Balances on the Current (BCA) and Capital (BKA) Accounts of the United States
500 400 300 200 100 0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 -100 -200 -300 -400 -500 U.S. BCA U.S. BKA

Source: IMF International Financial Statistics Yearbook, 2000 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res 3-

Balances on the Current (BCA) and Capital (BKA) Accounts of United Kingdom
40 30 20 10 0 1982 -10 -20 -30 -40 -50 1984 1986 1988 1990 1992 1994 1996 1998 2000

UK BCA UK BKA

Source: IMF International Financial Statistics Yearbook, 2000 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res 3-

Balances on the Current (BCA) and Capital (BKA) Accounts of Japan
150 100 50 0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 -50 -100 -150 Japan BCA Japan BKA

Source: IMF International Financial Statistics Yearbook, 2000 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res 3-

Balances on the Current (BCA) and Capital (BKA) Accounts of Germany
80 60 40 20 0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 -20 -40 -60 -80 Germany BCA Germany BKA

Source: IMF International Financial Statistics Yearbook, 2000 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res 3-

Balances on the Current (BCA) and Capital (BKA) Accounts of China
35 30 25 20 15 10 5 0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 -5 -10 -15 China BCA China BKA

Source: IMF International Financial Statistics Yearbook, 2000 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res 3-

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.

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Balances on the Current (BCA) and Capital (BKA) Accounts of Five Major Countries
500 400 300 200 100 0 19 -100 82 1984 1986 1988 1990 1992 1994 1996 1998 2000 -200 -300 -400 -500 C h in a B C A C h in a B K A Ja p a n B CA Ja p a n B K A G ermany B CA G ermany B KA UK BCA UK BKA U .S . B C A U .S . B K A

Source: IMF International Financial Statistics Yearbook, 2000 Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights res 3-

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