THE BALANCE OF

PAYMENTS AND
INTERNATIONAL ECONOMIC
LINKAGES
The
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
currentaccount
balance
must equal the net
capital outflow.

Japan is using its

large
currentaccount 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. currentaccount 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.