THE BALANCE OF PAYMENTS
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6
Various accounts
the balance of (merchandise) trade the balance on goods and services the balance on current account the balance on private capital account the balance on capital account the official (reserve) settlement balance
= change in foreign reserve holdings at the domestic central bank
- change in foreign central banks’ holding of domestic assets
(For most countries other than the US, the second term is negligible.)
• Capital outflow: purchase of foreign assets by domestic residents (a debit item in KA account)
There is a net capital inflow (outflow) if the sum of capital inflows is greater (smaller) than the sum of capital outflows.
11
=1 =1+2 = 1 + 2 +3 + 4 =5+ 7 =5+6+7+8 =6+8
The balance of payments balances! 1 + … + 9 = 0 Statistical discrepancy is included for this purpose.
Q: What is the basic balance? How is that related to the balances mentioned above?
5. US assets abroad, private
sale
6. US assets abroad, gn assets in the US, private purchase 8. Foreign assets in the US, official purchase 9. Statistical discrepancy
8
The Saving-Investment View of the Current Account
Y = C + I + G + (X-IM) : national income
Y = C + Sp + T
: how income is spent
C + Sp + T = C + I + G + (X-IM)
9
Q: Running a surplus on the current account for a year will be sufficient for a debtor country to become a creditor nation. True or false. Explain.
Q: Are current account deficits undesirable? Q: Why does the US have large CA deficits? Q: Are they sustainable?
More on US balance of payments: Data News report
10
Example
CA = - $100 bil Total KA balance = $100 bil Of this, if private KA = 70,
then official KA = ORS = 30. BP = -$30 bil
Assets: bank loans, deposits, stocks, bonds, etc.
Credit and Debit
• Credit: sale of domestic goods, services, assets to foreigners
• Debit: purchase of foreign goods, services, assets from foreigners
ORS or BP arises because of FX market intervention by central banks. Under pure flexible (or floating) exchange rates, there is no intervention and BP=ORS=0.
Lecture 7. THE BALANCE OF PAYMENTS
1
The Balance of Payments
Record all international transactions in goods, services, assets Services: travel, transportation, royalties, etc.
4
Figure 12.01 U.S. international transactions, 1946-1998
5
Capital inflow and outflow
• Capital inflow: purchase of domestic assets by foreigners (a credit item in KA account)
7
Some Important Relationships
• CA + KA + ORS = 0 balances
: The balance of payments table
• BP = CA + KA : Definition of the balance of payments
• BP = - ORS
CA = (X-IM) = Sp + (T-G) - I : the current account
CA = (X-IM) = Sp + Sg - I = S – I
S: national saving, Sp = private saving, Sg = government saving Current account surplus: lending to foreigners Current account deficit: borrowing from foreigners
2
Classification of International Transactions
1. Merchandise 2. Services 3. Investment income 4. Unilateral transfers
credit exports exports receipts receipts
debit imports imports payments payments
purchase purchase
sale sale
3
•Private financial transactions include direct investment, portfolio investment (security purchases), and bank claims and liabilities. •Financial transactions are also classified either short-term or long-term. Long-term means maturity longer than or equal to 1 year. •“Official” means assets treated as foreign reserves. They include foreign currencies, gold, Special Drawing Rights, and reserve position at the IMF.
Various accounts
the balance of (merchandise) trade the balance on goods and services the balance on current account the balance on private capital account the balance on capital account the official (reserve) settlement balance
= change in foreign reserve holdings at the domestic central bank
- change in foreign central banks’ holding of domestic assets
(For most countries other than the US, the second term is negligible.)
• Capital outflow: purchase of foreign assets by domestic residents (a debit item in KA account)
There is a net capital inflow (outflow) if the sum of capital inflows is greater (smaller) than the sum of capital outflows.
11
=1 =1+2 = 1 + 2 +3 + 4 =5+ 7 =5+6+7+8 =6+8
The balance of payments balances! 1 + … + 9 = 0 Statistical discrepancy is included for this purpose.
Q: What is the basic balance? How is that related to the balances mentioned above?
5. US assets abroad, private
sale
6. US assets abroad, gn assets in the US, private purchase 8. Foreign assets in the US, official purchase 9. Statistical discrepancy
8
The Saving-Investment View of the Current Account
Y = C + I + G + (X-IM) : national income
Y = C + Sp + T
: how income is spent
C + Sp + T = C + I + G + (X-IM)
9
Q: Running a surplus on the current account for a year will be sufficient for a debtor country to become a creditor nation. True or false. Explain.
Q: Are current account deficits undesirable? Q: Why does the US have large CA deficits? Q: Are they sustainable?
More on US balance of payments: Data News report
10
Example
CA = - $100 bil Total KA balance = $100 bil Of this, if private KA = 70,
then official KA = ORS = 30. BP = -$30 bil
Assets: bank loans, deposits, stocks, bonds, etc.
Credit and Debit
• Credit: sale of domestic goods, services, assets to foreigners
• Debit: purchase of foreign goods, services, assets from foreigners
ORS or BP arises because of FX market intervention by central banks. Under pure flexible (or floating) exchange rates, there is no intervention and BP=ORS=0.
Lecture 7. THE BALANCE OF PAYMENTS
1
The Balance of Payments
Record all international transactions in goods, services, assets Services: travel, transportation, royalties, etc.
4
Figure 12.01 U.S. international transactions, 1946-1998
5
Capital inflow and outflow
• Capital inflow: purchase of domestic assets by foreigners (a credit item in KA account)
7
Some Important Relationships
• CA + KA + ORS = 0 balances
: The balance of payments table
• BP = CA + KA : Definition of the balance of payments
• BP = - ORS
CA = (X-IM) = Sp + (T-G) - I : the current account
CA = (X-IM) = Sp + Sg - I = S – I
S: national saving, Sp = private saving, Sg = government saving Current account surplus: lending to foreigners Current account deficit: borrowing from foreigners
2
Classification of International Transactions
1. Merchandise 2. Services 3. Investment income 4. Unilateral transfers
credit exports exports receipts receipts
debit imports imports payments payments
purchase purchase
sale sale
3
•Private financial transactions include direct investment, portfolio investment (security purchases), and bank claims and liabilities. •Financial transactions are also classified either short-term or long-term. Long-term means maturity longer than or equal to 1 year. •“Official” means assets treated as foreign reserves. They include foreign currencies, gold, Special Drawing Rights, and reserve position at the IMF.