Chapter 13

International Economics

Li Yumei

Economics & Management School

of Southwest University

International Economics

Chapter 13

Balance of Payments

Organization 13.1 Introduction 13.2 Balance of Payments Accounting Principles 13.3 The International Transactions of the United

States 13.4 Accounting Balances and Disequilibrium in

International Transactions 13.5 The Postwar Balance of Payments of the

United States 13.6 The International Investment Position of the

United States Chapter Summary Exercises Internet Materials

13.1 Introduction

The Balance of Payments ConceptIt is a summary statement in which, in principle, all the transactions

of the residents of a nation with the residents of all other nations are

recorded during a particular period of time, usually a calendar year.

Functionto inform the government of the international position of the nation;

to

help it in its formulation of monetary, fiscal, and trade policies; to

consult the balance of payments of important trade partners in

making policy decisions; to inform the banks, firms and individuals

directly or indirectly involved in international trade and finance

Explanation

Summary statement: aggregation not individual for the nation

International transaction: the exchange of goods, services or

asset between the residents of one nation and the residents of

other nations

Residents: holding citizenship

Time dimension: one calendar year

13.2 Balance of Payments Accounting Principles Credits(贷方 ) and Debits (借方 ) Credit

They are those that involve the receipt of payments from

foreigners. Credit transactions are entered with a positive

sign(+).(收为贷方 )

Debit

They are those that involve the payments to foreigners. Debit

transactions are entered with a negative sign (-).(支为借方 )

Explanation Credits (+) transactions (receipt of payments from

foreigners) : Export of goods and services, unilateral transfers

(gifts) received from foreigners and capital inflows are credits(+)

Debits (-) transactions (payments to foreigners) : Import of

goods and services, unilateral transfers (gifts) made to

foreigners and capital outflows are debits (-)

Capital inflows: It can take the form of either an increase in

foreign assets (purchase foreign stocks) in the nation or a

reduction (sell foreign stocks) in the nation’s assets abroad

Capital outflows: It can take the form of either an increase in

the nation’s foreign assets (purchase foreign stocks) abroad or

a reduction (sell foreign stocks) in the nation’s assets abroad

Double-Entry Bookkeeping Concept

It means that each international transaction is recorded twice,

once as a credit and once a debit of an equal amount. This is

because in general every transaction has two sides. Total

debits equal total credits.

Examples

Textbook: page from 432-433

Problems

Textbook: 1-8 page 449-450

13.3 The International Transactions of the United States Case Study 13-1(page 435) The major Goods Exports and Imports of the

United States Exports of goods, services, and income Imports of goods, services, and income Unilateral transfer, net US-Owned assets abroad Foreign-owned assets in the US, net Allocation of special drawing rights Statistical discrepancy

13.4 Accounting Balances and Disequilibrium in International Transactions

Current Account & Capital Account Current Account The Account that includes all sales and purchases of currently

produced goods and services, income on foreign investments,

and unilateral transfer

Capital AccountThe change in the nation’s assets abroad and foreign assets in

the nation , other than official reserve assets

Autonomous Transactions & Accommodating Transactions

Autonomous Transactions （自主性交易） Internatio

nal transactions that take place for business or profit motives (ex

cept for unilateral transfers) and independently of balance-of-pay

ments considerations; also called above–the-line-terms.

Accommodating transactions （调节性交易）Transactions in official reserve assets required to balance intern

ational transactions; also called below-the-line items.

Deficit & Surplus in the Balance of Payment

Deficit in the Balance of Payment

The excess of debits over credits; equal to the net credit balance

in the official reserve account, or accommodating transactions.

Surplus in the Balance of Payment

The excess of credits over debits in the current and capital

accounts, or autonomous transactions; equal to the net debit

balance in the official reserve account, or accommodating

transactions.

13.5 The Postwar Balance of Payments of the United States

Current Account Positive trade balance on goods of the 1960s and

negative trade balance in 1970s, very large after 1982

Official Reserve Balance First large balance deficit in 1970, in 1996 all-time-high-

balance of-payments deficit (positive official settlements

represents a deficit in international transactions, while

negative balance represents a surplus

Case Studies of U.S. Balance with its major trading partners Case 1: The U.S. Trade Deficit with Japan

FIGURE 13-1 The U.S. Trade Balance with Japan in Goods and in Goods and Services, 1980-2001.

Case Studies of U.S. Balance with its major trading partners Case 2: The U.S. Trade Deficit with China

FIGURE 13-2 U.S. Exports, Imports, and Net Trade Balance in Goods with China, 1985-2001 (billions of dollars).

13.6 The International Investment Position o f the United States

Concept of International Investment Position

It measures the total amount and the distribution of a nation’s assets abroad and foreign assets in the nation at the end of the year. The balance of payments represents a flow concept(流量 ), and the international investment position represents a stock concept (存量）

It can be used to project the future flow of income or earnings from the nation’s foreign investments and the flow of payments on foreign investments in the nation.

USA International Investment Position Two different measures: one the values foreign direct

investments at current costs, the other the values foreign direct investments at market prices

Net international investment position with foreign direct investment measured at current cost, deteriorated sharply from 1980 to 1985, 1990, 1995, at the end of 2001 (see page 445 table 13.5)

U.S.,-owned assets abroad increased 6.6 times form 1980 to 2001

Conclusion: net debtor nation between 1985 and 1990; rapid rise in foreign holdings of U.S. securities and bank claims resulted primarily from higher interest rates and greater political stability in U.S. than abroad and half of federal budget deficit during the mid-1980s

Chapter Summary Concept of the balance of payments International transactions: credit or debit

transactions Accounting balances and Disequilibrium in

international transactions U.S. balance of payments and with its major trading

partners International investment position, or balance of

indebtedness, measures the total amount an distribution of a nation’s assets abroad and foreign assets in the nation at year end

Exercises: Additional Reading

U.S.- China trade problem, see: Federal Reserve Bank of New York, “The Growing U.S. Tr

ade Imbalance with China”, Current Issues in Economics and Finance (New York, Mary 1997)

U.S.- Japan trade problems, see: D.Salvatore, The Japanese Trade Challenge and the U.S. r

esponse (Washington, D.C.: Economic Policy Institute, 1990)

L.D’Andrea Tyson, Who’s Bashing Whom? Trade Conflict in High-Technology Industries (Washington, D.C.: Institute for International Economics, 1992)

Internet Materials

http://www.bea.doc.gov by clicking “international data”

http://webhost.bridgew.edu.baten http://www.bea.doc.gov/bea/pubs.html http://w3.access.gpo.gov/usbudget/fy2003/pd

f/2002-erp.pdf http://www.unctad.org/en/docs/wir99ove.pdf http://www.oecd.org