1. International Finance
International Economics
Balance of Payments
Chapter 10
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2. Content
I. Balance of payment
II. Double-entry accounting
III. International payment process
IV. Balance of Payments Structure
a. Current Account
b. Capital and Financial Account
V. U.S. Balance of Payments
VI. Current account deficit and surplus
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3. a. Current account deficit problem
b . Continue to run current account deficit?
c. Net Foreign Investment and the Current
Account Balance
d. Business Cycles, Economic Growth, and the
Current Account
VII. Global saving glut
VIII. Balance of International Indebtedness
a. United Stated as a Debtor Nation
IX. Summary
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4. I. Balance of Payments
o Definition
Balance of payments is a record of the
economic transactions between the residents of one
country and the rest of the word.
An international transaction is an exchange of
goods, services or assets between businesses,
individuals, and governments of one country and those
of another.
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5. II. Double-Entry Accounting
o All transaction are either credit or debit transaction.
o Credit transaction – receipt of payment from
foreigner.
• merchandise exports
• transportation & travel receipts
• Income received from investments abroad
• gifts received from foreign residents
• Aid received from foreign governments
• investment in U.S. by overseas residents
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6. II. Double-Entry Accounting
o Debit transactions - leads to payments to foreigners.
• Merchandise imports
• Transportation and travel expenditures
• Income paid on investments of foreigners
• Gifts to foreign residents
• Aid given by the U.S government
• Overseas investments by U.S residents
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7. III. International Payments Process
210,000 won TV
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8. IV. Balance of Payment Structure
a. Current account
o Current account - refers to the monetary value of
international flows associated with transactions in
goods, services, income flows and unilateral transfers.
o Merchandise trade balance – includes all goods that
U.S. exports (Credit) or imports (Debit).
o surplus (positive balance) implies exports > imports
o deficit (negative balance) implies imports > exports
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9. IV. Balance of Payment Structure
o Goods and services balance – added services to the
merchandise trade balance
o Unilateral transfers – include transfers of goods &
services (gifts in kind) or financial assets (money gifts)
between the U.S. and the rest of the world.
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10. IV. Balance of Payment Structure
b. Capital and Financial Account
o Capital and Financial Account– all international
purchases and sales of real estate, corporate stocks
and bonds, government securities and commercial
bank deposits.
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11. IV. Balance of Payment Structure
o examples:
• Direct investment – residents of one country acquire 10%
or more of business in another country.
• Securities – private sector purchases of short-and long-term
debt securities.
• Bank claims – loans, overseas
deposits, acceptances, foreign commercial paper.
• Bank liabilities – demand deposits, NOW
accounts, savings deposits, CDs.
o Official settlements transactions – movement of financial
assets among official holders such as the U.S Fed and Bank of
England.
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12. V. U.S. Balance of Payments - 2006
(Billions of Dollars)
oCurrent Account:
Merchandise trade balance -$838.3
Exports 1,023.1
Imports - 1,862.4
Services balance 79.8
Travel and transportation, net -10.6
Military transactions, net -14.0
Royalties and license fees , net 35.9
Other services, net 68.5
Goods and Services balance -758.5
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13. V. U.S. Balance of Payments - 2006
(Billions of Dollars)
Income Balance 36.6
Investment income, net 43.1
Compensation of employees, net -6.5
Unilateral transfers balance -89.6
U.S Government grants -27.2
U.S Government pensions -6.5
Private remittances -55.9
Current account balance -811.5
oCapital and Financial Account
Capital account transactions, net -$3.9
Financial account transactions, net 833.4
Statistical discrepancy -18.0
Balance on capital and financial account 811.5
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14. V. U.S. Balance of Payments 1980- 2006
(Billions of Dollars)
o Trade deficits can decrease value of dollar and
decreasing U.S. purchasing power abroad.
o Trade deficits can also decrease employment in domestic
industries but are offset by capital inflows generating
employment in other industries
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15. VI. Current account deficit and surplus
o Current account and capital & financial account are not
related, when one is in surplus the other must be in
deficit.
o Current account surplus means an excess of exports
over imports of goods and services, investment income
and unilateral transfers.
o Current account deficit implies an excess of imports
over exports of goods and services, investment income
and unilateral transfers.
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16. VI. Current account deficit and surplus
a. Current Account Deficit a Problem
o A current account deficit has little to do with foreign trade
practices or any inherent inability of a country to sell goods
in world market.
o Current account deficits are not efficiently reversed by trade
policies that attempt to alter the levels of import or exports.
o Resulting debt is less problematic if funds are used for
investment spending rather than consumption spending.
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17. VI. Current account deficit and surplus
b. Continuous to run Current Account Deficit?
o no economic reason why current account deficit cannot
continue indefinitely.
o From 1820-1875, the U.S ran current account deficits
almost continuously.
o Two principles to reduce the deficit, first U.S has an
interest in polices that stimulate for foreign growth and
second, increased national saving than through reduced
domestic investment
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18. VI. Current account deficit and surplus
c. Net Foreign Investment and the Current
Account Balance
o current account surplus => excess of exports over imports =>
net supplier of funds (lender) => improves net foreign
investment position
o current account deficit => excess of imports over exports =>
net demander of funds from abroad=> decline in net foreign
investment position
o net borrowing:
(G - T) + (I – S) = Current Account Deficit
Government Private Private (net borrowing)
Deficit Investment Saving 18

19. VI. Current account deficit and surplus
d. Business Cycles, Current Account &
Economic Growth
o Business cycles => if rapid growth and employment
=> growing trade and current account deficits. And if
slow output and employment growth => growing
surpluses.
o short run: recession => current account surplus
• Saving and investment tend to fall.
• imports tend to fall with overall consumption and
investment demand.
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20. VI. Current account deficit and surplus
d. Current Account & Economic Growth
o long run: rapid economic growth leads to current
account deficits, whereas those with weaker economic
growth have long-run current account surpluses.
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21. VII. Global saving glut
o Excess global savings hold interest rate down
which allowed U.S. borrowing from:
• corporate profits in Japan
• savings greater than investment in China or
China’s investment rate was the world’s highest
by far, but its saving rate was even greater.
• oil profits in the Saudi Arabia and Russia
o Surge in savings, lowered interest rates have
the potential to boost productivity and creates
the problem of Fed’s control of economy.
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22. VII. Global saving glut
o U.S. absorbed an estimated 75% of excess
world supply of savings in 2006
o Concern: reduction in such investment in the
U.S. will cause significant depreciation in the
dollar and a substantial increase in interest
rates
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23. VIII. Balance of international indebtedness
o Definition – a statment that summarizes a country's stock of
assets and liabilities against the rest of the world at a fixed point
in time.
o The balance of international indebtedness looks at short-and
long-term investment positions of both private and goverment
sectors of the economy.
o Indicates sensitive items, such as short term debt held by
foreigners which could be liquidated quickly, straining finances
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24. VIII. Balance of international indebtedness
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25. VIII. Balance of international indebtedness
a. U.S. as Debtor Nation
o net creditor – U.S. claims on foreigners exceed
foreign claims on U.S.
o net debtor – foreign claims on U.S. exceed U.S.
claims on foreigners
o reasons U.S. is net debtor: foreign investors placed
more funds in the U.S. because of economic growth
and political stability
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