Balance of

Payments
Accounting
The Balance of Payments
• Recall the open economy accounting
identity: Income = Expenditures
Y = C + I + G + NX
• Trade Deficits imply NX< 0
Therefore, Y- (C + I + G) = NX < 0

Trade deficit countries are spending more

than they earn (borrowing from the rest of
the world)
Balance of Payments
Accounting
• Anything that we buy or sell to the rest of
the world must be paid for.
• The current account (CA) tracks the flow
of goods and services between the US and
the rest of the world
• The capital & financial account tracks the
payments for those goods & services
(KFA)

CA + KFA = 0
The Current Account
• Any transaction that represents a flow of funds out of the
US is represented by debit (-). Transactions that represent
a flow of money into the US are represented by a credit(+)
• Net Exports of Goods and Services
Exports (+)
Imports (-)
• Net Income From Abroad (NFP)
Income Earned by US nationals abroad (+)
Income earned by foreign nationals in the US (-)
• Net Unilateral Transfers
Payments from foreign countries (+)
Payments to foreign Countries (-)
The US Current Account:
2003 (in Millions of $s)
Exports of Goods, Services, and Income
Goods: $ 713,122
Services: $ 307,381
Income Receipts:
Investment Receipts: $ 291,354
Employee Compensation: $ 3,031
Imports of Goods, Services and Income
Goods: -$1,260,274
Services: -$ 256,337
Income Receipts:
Investment Receipts: -$ 252,573
Employee Compensation: -$ 8,533
Net Unilateral Transfers: -$ 67,439
Current Account : -$530,668
US Exports
Other, 5%

Western Europe,
23%
Mexico, 15%

Pacific Rim, 26%

Canada, 23%

South/ Central
America, 8%
US Imports
Other, 9% Western Europe,
20%

Mexico, 11%

Canada, 19%

Pacific Rim, 34%

South/ Cemtral
America, 6%
The Capital & Financial
Account
• Again, any transaction that represents
funds flowing into (out of) the US are credits
(debits) in the KFA
• Financial assets
Foreign acquisition of US assets (+)
US acquisition of foreign assets (-)
• Official Reserve Assets
Foreign acquisition of US reserve assets (+)
US acquisition of foreign reserve assets (-)
The US Capital & Financial
Account: 2003 (in Millions of
$s)
Capital Account: -$ 3,079
US Owned Assets Abroad (Increase/Financial Outflow (-))

US Official Reserve Assets: $ 1,523

US Government Assets: $ 537
US Private Assets: -$ 285,574
Foreign Owned Assets in the US (Increase/Financial inflow (+))

Foreign Official Assets in the US: $248,573

Foreign Private Assets in the US: $580,600
Capital And Financial Account: $542,680

CA + KFA = -$530,668 + $542,680 = -$12,012

Balance of Payments
Accounting
• Consider three transactions:
1) Wal-Mart buys $100M worth of clothing from a Chinese Manufacturer. Wal-Mart
pays for the clothing by writing a check drawn off its account at Bank of America.
2) Warren Buffet collects $50M in interest payments from his financial investments
overseas. The Payment is made by crediting Warren’s bank account in London.
3) Microsoft sells $20M worth of software to the French government. They pay in
cash.
Balance of Payments
Accounts
Current Account Capital & Financial Account
Exports Foreign acquisition of US assets:
Goods: $20M (3) US Treasuries:
Services: Private Securities:$100M (1)
Imports FDI:
Goods:-$100M (1) Currency:-$20M (3)
Services: US acquisition of foreign assets:
Net Factor Income:$50 (2) FDI:
Net Unilateral Transfers: Foreign Securities:
-$50 (2)
CA Balance: -$30M Official Reserve Assets
Foreign acquisition of US ORA:

US acquisition of foreign ORA:

KFA Balance: $30M
Tsunami Relief Aid
• President Bush recently authorized
$350M in aid for the Asian countries
affected by the Tsunami.
• This will appear in the BOP accounts under
unilateral transfers.
• Assume we pay this transfer in cash (most
likely we would pay by check)
Balance of Payments
Accounts
Current Account Capital & Financial Account
Exports Foreign acquisition of US assets:
Goods: US Treasuries:
Services: Private Securities:
Imports FDI:
Goods: Currency: $350M
Services: US acquisition of foreign assets:
Net Factor Income: FDI:
Net Unilateral Transfers: - Portfolio Investment:
$350M Official Reserve Assets
CA Balance: -$350M Foreign acquisition of US ORA:

US acquisition of foreign ORA:

KFA Balance: $350
US Balance of Payments
20
0
J an-80

J an-86

J an-89

J an-95

J an-98

J an-01
J an-83

J an-92
-20
-40
-60
Current Account
-80
-100
-120
-140
-160
US Balance of Payments
250
200
150
100
50 Current Account
0 FKA
J an-80

J an-86

J an-89

J an-95

J an-98

J an-01
J an-83

J an-92

-50
-100
-150
-200
-200
-150
-100
100
150
200

-50
50
0
J an-80

J an-82

J an-84

J an-86

J an-88

J an-90

J an-92

J an-94

J an-96

J an-98

J an-00

J an-02
BOP
US Balance of Payments
US Trade Weighted
Exchange Rate Index
140
130
120
110
100
90
80
70
60
50
Jan-93

Jan-01
Jan-85

Jan-87

Jan-89

Jan-91

Jan-95

Jan-97

Jan-99

Jan-03
Balance of Payments and
Exchange Rates
 Should the Balance of Payments Accounts
influence exchange rates?
 A BOP deficit (surplus) indicates that financial
assets flowing out of (into a) country. Shouldn’t
that indicate a currency depreciation?
 No really….the balance of payments is an
accounting statement. Given the pattern of
exchange rates, the BOP indicates the
transactions that took place (Remember, by
definition, BOP=0)
US Trade Accounts
2 80
1.8 70
1.6 60
Trillions of $

Billions of $
1.4 50 Exports
1.2 40
1 30 Imports
0.8 20
Unilateral
0.6 10
Transfers
0.4 0
0.2 -10
0 -20
1986

1988

1990

1992

1994

1996

1998

2000
1980

1982

1984

2002
 Billions of $

-1.5
-0.5
0.5
1.5

-1
0
1
2
1960

1963

1966
Position

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999
US Official Reserve

2002
Gold
 Billions of $

-30
-25
-20
-15
-10
10

-5
0
5
1960
1963
1966
1969
Position
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
US Official Reserve

Foreign Currency
US Foreign Investment
50

0
0

2
8

0
19

19

19

19

19

19

19

19

19

20
19

20
Billions of $

-50
FDI
-100
Portfolio
I nvestment
-150

-200

-250
Foreign Investment in the
US
1.2
1
Trillions of $

0.8
0.6 Official
0.4 Private

0.2
0
-0.2
80

82

84

86

88

90

92

94

96

98

00

02
19

19

19

19

19

19

19

19

19

20
19

20
The US BOP
 Consider an alternative form of the
national income accounting
identity.
Y = C + I + G + NX (Income = Expenditures)
- Y = C + S + T (Income = Outlays)
0 = I + (G-T) + NX – S

S = I + (G-T) + NX (Source of Funds = Use of Funds)

The US BOP
 The US is running record trade deficits due
to over consumption (US domestic savings
is low and the government deficit is large)
 Unlike past years, this trade deficit is NOT
being financed by foreign private
investment in the US, but rather by central
banks purchasing US government
debt…..this is potentially troubling!