Balance Of Payments
Balance of Payments: the statistical record of a country’s international transactions over a certain period of time presented in the form of double-entry bookkeeping.
Payments by residents of other countries, say Japan, to U.S. residents are shown as “CREDITS” (+) in the US BOP and as “DEBITS” (-) in Japan’s BOP.
Payments by US residents to residents of other countries are a “DEBIT” (-) in the US BOP and a “CREDIT” (+) in the other country.
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
Statistical Discrepancy
The Official Reserves Account
The Current Account
• Goods and Services
• Unilateral Transfers of Foreign Aid
• If the debits exceed the credits, then a country is running a trade deficit.
The Capital Account
• Measures the difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets.
• U.S. enjoys about a $150,000,000 capital surplus-absent of U.S. borrowing from foreigners, this “finances” our trade deficit.
• Foreign Direct Investment (FDI), portfolio investments and other investments
• Financial and Real Investment (Direct Investment), also Speculative Flows
Examples:
• U.S. sells phantom jets to Saudi Arabia: CREDIT to CURRENT ACCOUNT
• U.S. gives $2 billion to Israel: DEBIT to CURRENT ACCOUNT
• Greencard holders send $2 billion to their families abroad: DEBIT to CURRENT ACCOUNT
• Dell builds a $500 million plant in China: DEBIT to CAPITAL ACCOUNT
• The FED lowers rates, U.S. residents transfer $10 billion to international earnings account abroad: DEBIT to CAPITAL ACCOUNT
Deficit...
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