Bop

THE BALANCE OF PAYMENTS AND INTERNATIONAL ECONOMIC LINKAGESThe balance of payments summarizes a nations international economic transactions.

Balance of payments accounting is based on double-entry bookkeeping.

Increases (decreases) in foreign currency assets show up as debits (credits) on the balance of payments.

The current-account balance reflects the net flow of goods, services, and gifts.

The capital account shows public and private lending and investment activities.

The official reserves account shows the net deficit or surplus on a nations combined current and capital accounts.

Basic macroeconomic accounting identities link domestic spending and production to the current-account and capital-account balances.

A nation whose income exceeds its spending will have a domestic savings surplus that must be invested abroad.

A nation that produces more (less) than it spends will have a net capital outflow (inflow)

The current-account balance must equal the net capital outflow.

Japan is using its large current-account surplus to invest in the United States.

To improve the current-account balance, domestic savings must be increased relative to domestic investment.

Current-account deficits (surpluses) are not necessarily signs of economic weakness (strength).

A government budget deficit will worsen a nations current-account deficit.

The U.S. current account deficit during the 1980s was closely related to the federal deficit.

One proposed solution to the U.S. current-account deficit is to devalue the dollar and make U.S. goods more competitive.

Historical experience indicates that currency devaluation will not cure a trade deficit.

J-curve theory predicts that currency devaluation will initially worsen and then improve a nations trade deficit.

Instead of one causing the other the strong dollar and the trade deficit may both have resulted from foreign demand for U.S. assets.

The price of the dollar determines the terms on which the rest of the world is willing to finance the U.S. budget deficit.

Protectionism is likely to reduce both imports and exports by the same amount, leaving the trade deficit unchanged.

Ending foreign ownership of domestic assets would eliminate a trade deficit but slow economic growth.

One way to reduce the trade deficit is to boost the national savings rate.

The large U.S. trade deficits during the 1980s and 1990s do not appear to have harmed U.S. economics performance.

Trade deficits, by themselves, are neither good nor bad, as shown by the experience of United States.

The U.S. current-account deficit reflects national preferences for consumption, savings, and investment to which trade flows have adjusted in a timely manner.