Balance of Payments

Balance of payments (BoP) accounts: an accounting record of all monetary transactions between a country and the rest of the world

These include: 
Current Accounts
    Goods: Consumer, Capital, Agricultural
    Services:  Receipts versus Payments
        (includes Travel, Royalties, License Fees)

Capital / Financial Accounts
    “Net Capital Account Payments”
    Assets:  Purchases of Securities, Direct Investment Payments

Official Reserve Assets

Why keep track of this?

• To establish the ability to balance accounts and trade in the future
• Fixed vs. floating exchange rates 

Individuals and Businesses record stuff like...

• Job income, interest income, consumption payments, investment payments

So nations are expected to keep track of this responsibly

• Why? helps stabilize currencies and trade expectations for future investments

International BOP can be summarized as a ledger sheet for each trading nation.

• Current Account keeps track of the difference between a country's total exports and total imports. (physical stuff, services, investment income, transfers) 
• trade deficit = importing more than you export (Xn is a negative number) 
• trade surplus = exporting more than you import (Xn is a positive number) 
• Capital Account (sometimes called the Financial Account) keeps track of ownership of assets. (foreigners who own US assets and US citizens who own foreign assets)
• Net Capital Outflow 

Terms:
Current Account (CA): An immediate and final transaction
CA Net Exports                                 Export values minus Import                                                                 values
CA Balance of Trade                        (Goods and Services)
CA Balance on Goods & Services   Tourism Expenditures
CA Trade Balance

• CA Net Investments: Payments on prior stock and bond investments like dividend payments 
• CA Net Transfers: Aid, Transfers and Remittances, Royalty Payments

Capital and Financial Account (KA): Purchases and payments are made that hope to create future revenues and obligations (people buy stuff as an investment)

• KA Real and Financial Assets: Stocks, Bonds, Land, Companies, Franchises, ….

Reserves: Used to balance out accounts if Current Accounts don’t equal Capital and Financial Accounts  

• Official Reserves: Gold and Currency Holdings 
• Official Settlements: Also Gold and Currency Holdings 
• Special Drawing Rights at the IMF: Funds held by the International Monetary Fund

BOP Assets or Credits: A positive number for a nation

• Currency Inflows: Wealth amounts coming into a country as a result of the transaction 
• Currency Demand: Wealth amounts are therefore demand for the currency of the country

BOP Liabilities or Debits: A negative number for a nation

• Currency Outflows: Wealth amounts leaving a country as a result of the transaction 
• Currency Supply: Wealth amounts are therefore supply of the currency moving out of the country

A Final Word on Balances

• There is constant news and discussion about the USA’s massive and increasing Trade Deficit.  
• This is most obvious in the imbalance of imports versus exports, 
• the US imports hundreds of billions more annually that it exports.  

The two major culprits are usually:  

• oil imports 
• trade with China.  

We do export lots of items, 

• mostly heavy equipment and services
• but those amounts do not equal the oil imported and the lack of ability to sell goods to China. (right now) 

what really occurs 

• oil producing nations and China turn around and use lots of the extra dollars they receive and invest in US stocks and bonds (Capital and Financial Account Asset for the US).

People in the US worry when 

• China tries to buy stuff like US car companies
• US ports (blocked by the government)
• China tries to buy the panama canal
• resource rich areas in Africa