Balance of Payments Notes

Bureau of Economic Analysis and BOP Data

bea.gov

Current Accounts

          Goods: Consumer, Capital, Agricultural

          Services:  Receipts versus Payments

                   (includes Travel, Royalties, License Fees)

Capital Accounts

          “Net Capital Account Payments”

Financial Accounts

          Assets:  Purchases of Securities, Direct Investment Payments

Official Reserve Assets

Balances of Payments:  Notes

Why are nations expected to record BOP?

To establish the ability to balance accounts and trade in the future

Individuals and Businesses are expected to record balances like:

Job income, interest income, consumption payments, investment payments

Nations are therefore expected to operate in similar, responsible ways.

This helps stabilize currencies and trade expectations for future investments

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

A Caution About Terminology

The four major textbooks, the BEA, the IMF, and several professor’s articles all

used variations of the main labels of this unit.  None agreed on all of the names of sub-units.  You add to this the AP use of terms and the situation is, at best, confusing.  However, there seems to be growing consensus on some compromises.  I will use these compromises from now on and feel confident that if we prepare students for possible variations, they can sort the names out correctly.

“Most BOP presentations give you two large categories:  a Current Account, which includes trade, and a Capital Account, which includes sales and purchases of assets.  The IMF uses this basic division, but they call the Capital Accounts the “Financial Account”…  What’s not fair is that they have (also) named one of the more obscure sub-categories of the Financial Account the “Capital Account”.  So what the IMF calls the capital account is not what most textbooks call the capital account.  Worse, they keep moving it (to new and different account columns).

(Dr. Danby, University of Washington)

A Safe Consensus

Keep calling a Current Account item a Current Account

Call what AP used to label as Capital Account as a Capital and Financial Account.  Tell students that this is a likely update and that they should watch out for older labels. 

Summary of Terms that Students need to Know

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

                                           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, where the US imports hundreds of billions more annually that it exports.   The two major culprits are usually:  oil imports and 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. 

  Economists correctly point out that what really occurs is that 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).

  The debate continues however when countries like China try to use their huge dollar holdings to attempt to buy car companies (Hummer) and ports and oil companies (blocked by the US government).   We also worry about China’s moves to buy the entire Panama Canal and large sets of resources in Africa, etc. 

  Still, economists often insist that the problems are overblown.  “How about the issue of foreign ownership?  By the end of 2003, Americans owned assets abroad

valued at market prices of $7.86 trillion, while foreigners owned US assets valued at market prices of $10.52 trillion.  The net international investment position of the United States, therefore, was $2.66 trillion.  This was only about 8.5 percent of the U.S. capital stock” (Herbert Stein)