Chapter 10 Balance of Payments
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Chapter 10 Balance of Payments
Key terms:
1. Balance of payments (国际收支平衡表)
2. Capital account (资本账户)
3. Credit transactions (贷方交易)
4. Deficit in the balance of payments (国际收支赤字)
5. Debit transactions (借方交易)
6. Official reserve account (官方储备帐户)
7. Capital inflow (资本流入)
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Continued: Key terms:
8. Surplus in the balance of payments (国际收支顺差)
9. Capital outflow (资本流出)
10. Official settlements balance (官方结算平衡)
11. Double-entry bookkeeping (复式簿记)
12. Autonomous transactions (自主性交易)
13. Unilateral transfers (单方面转移)
14. Accommodating transactions (融通性交易)
15. Statistical discrepancy (统计误差)
16. International investment position (国际投资状况)
17. Current account (经常项目)
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Chapter 10 Balance of Payments
Aims of the chapter:
1. Understand what the balance of payments is
2. What is the balance of payments measures
3. Understand the meaning of disequilibrium in
international transactions
4. Know how to measure a deficit or a surplus in
nation’s balance of payments
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10.1 Introduction
In parts One to Three of the text, we dealt the
“real” side of the economy. Money was not
explicitly considered, and the discussion was in
terms of relative commodity prices. When trade
occurs between two nations, many types of
financial transactions are also recorded on a
summary statement called balance of payments.
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Continued: 10.1 Introduction
From now we are examining the “monetary” aspects of
international economics, or international finance—
money is explicitly brought into the picture. That is the
commodity prices are expressed in terms of domestic and
foreign currency units.
We begin our exploration of international finance by
considering the nature and significance of a nation’s
balance of payments.
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10.2 The balance of payments: definition and use
1. Definition of the balance of payments (nature)
The balance of payments is a summary statement in
which, in principle, all the transactions of the residents
of a nation with the residents of all other nations are
recorded during a particular period of time, usually
over the course of a one-calendar-year periods.
国际收支平衡表是一个扼要的表述，原则上它是一国居
民与其他国家居民在一段特定的时间内（通常是一年）发生
的所有交易的记录。
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Continued:
10.2 The balance of payments: definition and use
2. Purposes of the balance of payments (significance)
(1) to inform the government of the international
position of the nation;
(2) to help it in its formulation of monetary, fiscal, and
trade policies;
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Continued: Purposes of the balance of payments
(3)Governments also regularly consult the balance of
payments of important trade partners in making policy
decisions;
(4)The information contained in a nation’s balance of
payments is also indispensable to banks, firms and
individuals directly or indirectly involved in international
trade and finance.
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Continued:
10.2 The balance of payments: definition and use
3. An international transaction
It refers to the exchange of goods, services, or
assets between the residents of one nation and the
residents of other nations. But who is a resident of
a nation. What is meant by the term resident?
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Continued:
10.2 The balance of payments: definition and use
4. Residents
(1) military personnel,
(2) government diplomats,
(3) tourists, and
(4) workers
who emigrate temporarily are considered residents of
the country in which they hold citizenship.
----they are home residents.
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Continued: Residents
(5) a corporation
is the resident of the nation in which it is incorporated
(foreign resident), but
(6) the corporation’s foreign branches or subsidiaries
are not (they are home residents).
(7) UN, IMF, the World Bank, and WTO etc., the
international institutions are not residents of the nation in
which they are located.
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10.3 Balance-of-payments accounting principles:
credits and debits
International transactions are classified as credits or
debits.
1. Credits transactions (贷方交易)
Credits transactions are those that result in the receipt
of payments from foreigners, entered with a positive sign.
(贷方交易是从外国人那里收款的交易，记帐符号为正号).
Export of goods and services, unilateral transfers (gifts)
received from foreigners, and capital inflows are entered
as credits (+)
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Continued: 10.3 Balance-of-payments accounting
principles: credits and debits
2. Debits transactions (借方交易)
Debits transactions are those that involve the making
of payments to foreigners, entered with a negative sign (借
方交易是指向国外付款的交易，记帐符号为负号)
Import of goods and services, unilateral transfers of gifts
made to foreigners, and capital outflows involve payments
to foreigners are entered as debit (-)
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Continued: 10.3 Balance-of-payments accounting
principles: credits and debits
3. Capital inflows (资本流入)
★An increase in foreign assets in the nation or ★ a
reduction in the nation’s assets abroad.
4. Capital outflows (资本流出)
★An increase in the nation’ assets abroad or ★ a
reduction in foreign assets in the nation.
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Continued: 10.3 Balance-of-payments accounting
principles: credits and debits
Illustration of the capital inflow and capital out flow:
★ when a foreign resident purchases a U.S. stock, foreign
assets in the U.S. increase. This is a capital inflow and is
recorded as a credit in the U.S. balance of payments because it
involves the receipt of a payment from a foreigner.
★ Capital inflow can also take the form of a reduction in
the nation’s assets abroad. When a U.S. resident sells a foreign
stock, U.S. assets abroad decrease. This is a capital inflow into
the U.S. because it too involves the receipt of a payment from
foreigners.
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Continued: 10.3 Balance-of-payments accounting
principles: credits and debits
An example:
Take the U.S as an example: the distinction is
clarified when we assume that transactions take
place between U.S. residents and foreigners and that
all payments are financed in dollars.
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Continued: An example:
From the U.S. perspective, the following transactions
are credits(+), leading to receipts of dollars from foreigners.
(1) Merchandise exports
(2) Transportation and travel receipts
(3) Income received from foreign residents
(4) Gifts received from foreign residents
(5) Aid received from foreign governments
(6) Investments in the U.S. by overseas residents
(7) Capital inflows
These entries are entered as credits.
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Continued: An example:
Conversely, the following transactions are debits (-) from
the U.S. point of view because they involve payments to
foreigners.
(1) Merchandise imports
(2) Transportation and travel expenditures
(3) Income paid on investments of foreigners
(4) Gifts to foreign residents
(5) Aid given by the U.S. governments
(6) Overseas investments by the U.S. residents
(7) Capital outflows
These entries are entered as debits.
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10. 4 Double-entry bookkeeping
In recording a nation’s international transactions, the
accounting procedure known as double-entry bookkeeping is
used. This means that each international transaction is
recorded twice, once as a credit and once as a debit of an
equal amount. The reason for this is that in general every
transaction has two sides. We sell something and we receive
payment for it. We buy something and we have to pay for it.
The following examples illustrate the double-entry
bookkeeping technique.
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10. 4 Double-entry bookkeeping
Example 1
Suppose that a U.S. firm exports $500 worth of goods to be
paid for in three months. The export is entered in the U.S. balance
of payment as a credit transaction because it will lead to the
receipt of a payment from foreigners.
The payment itself is also entered as capital debit because it
represents a capital outflow from the U.S. That is, by agreeing to
wait three months for payments, the U.S. exporter is extending
credit to, and has acquired a claim on, the foreign importer. This
is an increase in U.S. assets abroad and a debit.
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Example 1
Goods exports
Capital outflow
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Credit(+)
$500
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Debit(-)
$500
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Example 2
Suppose a U.S. resident visits London and spends
$200 on hotels,meals, and so on.
★First the U.S. debits travel services for $200.
Because the U.S. resident is purchasing travel services
from foreigners requiring a payment, which is similar to
a U.S. import.
★ The payment itself is then entered as a credit
because it represents an increasing in foreigner claims on
the United States
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Example 2
Credit(+)
Travel services purchased from foreigners
Capital inflow
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Debit(-)
$200
$200
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Example 3
Assume that the U.S. government gives a U.S. bank
balance of $100 to the government of a developing
nation as part of the U.S. aid program.
★The United States debits unilateral transfers for
the $100 gift given (payment made) to foreigners.
★The payment itself is the U.S. bank balance given
to the government of the developing nation. This
represents an increase in foreign claims on, or foreign
assets in, the United States and is recorded as a capital
inflow, or credit, in the U.S. balance of payments. The
entire transaction is thus:
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Example 3
Credit(+)
Unilateral transfer made
Capital inflow
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Debit(-)
$100
$100
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Example 4
Suppose that U.S. resident purchases a foreign stocks for
$400 and pay for it by increasing foreign bank balances in
the U.S.
★The purchase of the foreign stock increase U.S. assets
abroad. This is a capital outflow from the United States
and is recorded as a capital debit of $400 in the U.S.
balance of payments.
★The increase in foreign bank balance in the United
States is an increase in foreign assets in the United States
(a capital inflow to the United States) and is entered as a
credit in the U.S. balance of payments.
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Example 4
Credit(+)
Capital outflow (the purchase of the
foreign stock by the U.S. resident)
Capital inflow (the increase in foreign
bank balances in the U.S.)
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Debit(-)
$400
$400
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Example 5
Suppose that a foreign investor purchases $300 of U.S. treasury
bills and pays by drawing down his bank balances in the U.S. by an
equal amount.
★ The purchase of the U.S. treasury bills increases foreign assets
in the United States. This is a capital inflow to the United States and
is recorded as a credit in the U.S. balance of payments.
★The drawing down of U.S. bank balances by the foreigner is a
reduction in foreign assets in the United States. This is a capital
outflow from the United States and is recorded as a capital outflow
of the U.S. balance of payments, the debit.
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Example 5
Credit(+)
Capital inflow (the purchase of
U.S. treasure bills by a foreigner)
Capital outflow (the reduction
in foreign bank balance in the U.S.)
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Debit(-)
$300
$300
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Summary of the example 1- 5
If we assume that these five transactions are
all the international transactions of the United
States during the year, then the U.S. balance of
payments is as follows:
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Summary of the example 1- 5
Credit(+)
$500
Goods
Services
Unilateral transfer made
Capital net
Total debits and credits
$500
Debit(-)
$200
100
200
$500
$200=-$500+$200+$100-$400+$400+$300-$300
The net capital debit balance of -$200 is obtained by adding
together the seven entries previously examined separately. Total
debits equal credits because of double-entry bookkeeping.
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10. 5 The international transactions of the United States
Table 10.1 presents a summary of the international
transactions of the United States for the year 2002. In the
table, credits are entered with positive signs and debits
with negative signs.
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10. 6 The international transactions of the United States
Exports of goods, services, and income
1,230
Imports of goods, services, and income
-1,652
Unilateral transfers, net
-59
U.S.-owned assets abroad, net (increase/financial outflow(-))
-179
Foreign-owned assets in the U.S., net (increase/financial inflow(+))
707
Statistical discrepancy
-47
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13.3 Accounting Balances and Disequilibrium in International
Transactions
• Current account lumps together all sales and purchases of
currently produced goods and services, investment incomes, and
unilateral transfers and provides the link between the nation’s
international transactions and its income level.
• Capital account measures the change in the stock of all nonreserve financial assets, that is, the change in U.S.-owned assets
abroad and foreign-owned assets in the U.S., other than official
reserve assets.
The justification for excluding official reserve assets from the
capital account is that changes in reserve assets reflect
government policy rather than market forces.
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• Autonomous transactions refers to all the transactions in the
current and capital accounts. It is so called because they take
place for business or profit motives(except for unilateral transfer )
and independently of balance-of-payments considerations—
sometimes referred to as “the items above the line”.
• On the other hand, transactions in official reserve assets are
called accommodating transactions or “the items below the line”,
because they result from,and needed to balance, international
transactions.The accommodating items form the official reserve
account, and the balance on the official reserve account is called
official settlements balance.
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• A deficit in the balance of payments can be measured
either by the excess of debits over credits in the current
and capital accounts, or by the excess of credits over
debits in the official reserve account.
• A surplus in the balance of payments occurs when a
nation’s total credits exceed its total debits in the
current and capital accounts and is settled by an equal
debit balance in the official reserve account.
Income runs behind one’s expenditure
37 (end of chapter 13)
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