Chapter 4: The Balance of Payments
Power Points created by:
Joseph F. Greco Ph. D.
California State University, Fullerton
Mihaylo College of Business and Economics
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Chapter 4: The Balance of Payments
4.1
The Balance of Payments: Concepts and
Terminology
4.2
Surpluses and Deficits in the Balance of
Payment Accounts
4.3
The Dynamics of the BOP
4.4
Savings, Investment, Income, and the BOP
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4.1 The Balance of Payments: Concepts
and Terminology
The Balance of Payments : Overview
• Introduction
• Major Accounts of the Balance of Payments
• Double-Entry Accounting System
• Current Account Transactions
• Capital Account Transactions
• Official Reserves Account Transactions
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4.1 The Balance of Payments: Concepts
and Terminology
• Introduction
• Balance of payments (BOP)
• Accounting statement that summarizes all the
economic transactions between residents of
the home country and residents of all other
countries
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4.1 The Balance of Payments: Concepts
and Terminology
• Major Accounts of the Balance of Payments
• Current account
• Imports, exports, transfers
• Capital account
• Official settlements/reserves account
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4.1 The Balance of Payments: Concepts
and Terminology
• Double-Entry Accounting System
• Credit/debit transactions
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4.1 The Balance of Payments: Concepts
and Terminology
• Current Account Transactions
• Interest and dividend receipts and payments
• Transfer payments between countries
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4.1 The Balance of Payments: Concepts
and Terminology
• Capital Account Transactions
• Capital outflow
• Capital flight
• Capital inflow
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4.1 The Balance of Payments: Concepts
and Terminology
• Official Reserves Account Transactions
• Official international reserves
• Implications for fixed exchange rates
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Exhibit 4.1
Summary of the Accounts of the Balance of Payments
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4.2 Surpluses and Deficits in the Balance
of Payment Accounts
Surpluses and Deficits: Overview
• Introduction
• An Important Balance of Payments Identity
• The U.S. Current Account
• The U.S. Capital and Financial Accounts
• BOP Deficits and Surpluses and the Official
Settlements Account
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4.2 Surpluses and Deficits in the Balance
of Payment Accounts
• Introduction
• Surplus/deficit
• Surplus results when the credit exceed the
debit transactions
• Deficit results when the debits exceed the
credit transactions
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4.2 Surpluses and Deficits in the Balance
of Payment Accounts
• An Important Balance of Payments Identity:
current account + capital account = 0
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4.2 Surpluses and Deficits in the Balance
of Payment Accounts
• The U.S. Current Account
• Goods
• Services
• Balance on good and services
• Investment income
• Unilateral current transfers, Net
• Balance on current account
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Exhibit 4.2
The U.S. Current Account, 1970-2005
(Millions of Dollars; Credits, +; Debits, -)
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4.2 Surpluses and Deficits in the Balance
of Payment Accounts
• The U.S. Capital and Financial Accounts
• U.S.-Owned assets abroad, net
• Foreign assets in the U.S., net
• Capital account transfers
• Balance on the capital account
• The statistical discrepancy
• The official settlements, or reserves, account
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Exhibit 4.3
The U.S. Capital and Financial Account, 1970-2005
(Millions of Dollars; Credits, +; Debits, -)
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Exhibit 4.4
U.S. Balance of Payments Accounts for 2005
(Billions of Dollars)
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Exhibit 4.5
World Current Account Balance
(Billions of U.S. Dollars)
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4.2 Surpluses and Deficits in the Balance
of Payment Accounts
• BOP Deficits and Surpluses and the Official
Settlements Account
• The central bank gains or loses international
reserves
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Exhibit 4.6
Current Account Balances for the G7 Countries as
a Percentage of GDP
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Exhibit 4.6
Current Account Balances for the G7 Countries as
a Percentage of GDP (continued)
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Exhibit 4.7
Current Account Balances for Developing Asian
Economies as a Percentage of GDP
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4.3 The Dynamics of the BOP
• The Trade Account and the Investment Income
Account
• Countries as Net Creditors or Net Debtors
• Net foreign assets
• Data on International Investment Positions
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Exhibit 4.8
International Investment Positions
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4.4 Savings, Investment, Income, and the
BOP
Savings, Investment, Income and the BOP:
Overview
• Introduction
• Linking the Current Account to National Income
• National Savings, Investment, and the Current Account
• Current Accounts and Government Deficits
• What Causes Current Account Deficits and Surpluses?
• Ricardian Equivalence
• Individuals’ Intertemporal Budget Constraints
• Investment Spending
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4.4 Savings, Investment, Income, and the
BOP
• Introduction
• National income and product accounts (NIPA)
• The current account surpluses and deficits are
linked to the saving and spending patterns of
a country
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4.4 Savings, Investment, Income, and the
BOP
Linking the Current Account to National Income:
GNI = GSP + NFI
GNI – (C+ I + G) = GDP + NFI – (C + I +G)= NX + NFI
Important National Income Accounting Identity:
GNI – ( C + I +G) = CA
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4.4 Savings, Investment, Income, and the
BOP
• National Savings, Investment, and the Current
Account
• National Savings = GNI – Consumption of public
and private sectors
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4.4 Savings, Investment, Income, and the
BOP
• Current Accounts and Government Deficits
• Net private saving
• National government saving
• Surplus on the government budget
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4.4 Savings, Investment, Income, and the
BOP
• What Causes Current Account Deficits and
Surpluses?
• Ricardian Equivalence
• Individuals’ Intertemporal Budget Constraints
• Investment Spending
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4.4 Savings, Investment, Income, and the
BOP
• Ricardian Equivalence
• The idea that the timing of taxes is irrelevant
• Individuals will increase saving in response to a
reduction in current taxation
• They know they will be taxed more in the future to
pay the interest and principal on the
government’s debt
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4.4 Savings, Investment, Income, and the
BOP
Individuals’ Intertemporal Budget Constraints
• decisions to work, how much to consume and how to
invest any accumulated wealth depend on
• The prices and opportunities likely in the future
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4.4 Savings, Investment, Income, and the
BOP
Investment Spending
• Business continually evaluate investment projects
subject to intertemporal budget constraint
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