Transcript Lecture Slides Chapter 10

Balance of Payments
Chapter 10
Copyright © 2009 South-Western, a division of Cengage Learning. All rights reserved.
Balance of Payments
o definition – record of exchange of goods,
services or assets between businesses,
individuals, and governments of one country
with the rest of the world
o credit – receipt of payment from foreign source
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merchandise exports
transportation & travel receipts
gifts from foreign residents
investment in U.S. by foreign residents
o debit – payment to foreign source
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merchandise imports
transportation & travel expenditures
gifts to foreign residents
foreign investment by U.S. residents
aid given by U.S. government
Current Account
o definition – monetary value of transactions in
goods, services, income flows and unilateral
transfers
o merchandise trade balance – includes all goods
that U.S. exports or imports
o surplus (positive balance) implies exports > imports
o deficit (negative balance) implies imports > exports
o goods and services balance – services added
to merchandise trade balance
o unilateral transfers – gifts of goods & services
or financial assets between the U.S. and the
rest of the world
Capital and Financial Account
o definition – international purchases & sales of
real estate, stocks & bonds, government
securities and commercial bank deposits
o examples:
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direct investment – residents of one country acquire
10% or more of business in another country
securities – private sector purchases
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 Fed and Bank of England
Official Reserve Assets
purposes:
o international liquidity to finance short run trade
deficits and weather periodic currency crises
o provide ability to buy or sell reserve assets in
private
markets in
order to
stabilize
exchange
rates
U.S. Balance of Payments - 2008
(amounts in billions)
U.S. Balance of Payments: 1980-2008
(amounts in billions)
o trade deficits can decrease value of dollar
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
Net Foreign Investment and the Current
Account Balance
o current account surplus => excess of exports
over imports => net supplier of funds =>
improves net foreign investment position
o current account deficit => excess of imports over
exports => net demander of funds => decline in
net foreign investment position
o net borrowing:
(G
-
T) + (I
–
S) = Current Account
Government Private Private
Deficit
Deficit
Investment Saving
(net borrowing)
Is Current Account Deficit a Problem?
o A current account deficit has little to do with
inherent inability of a country to sell goods in
world market.
o Rather, such a deficit indicates imports were
needed to meet the domestic demand for
goods and services.
o Current account deficits are not 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.
Current Account & Economic Growth
o short run: recession => current account surplus
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savings falls but investment falls to a greater degree
imports tend to fall with the decrease in overall
demand
o long run: rapid
economic
growth leads to
current account
deficits because
of investment
financed via
foreign saving
Continuous Current Account Deficit?
o no economic reason why current account deficit
cannot continue indefinitely
o deficits from 1820-1875 as other nations
invested in the U.S.
o dependent on foreign willingness to invest in the
U.S.
o current account
could be
decreased
through foreign
growth and
increased
national savings
Global Savings Glut?
o excess global savings allowed U.S. borrowing
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corporate profits in Japan
savings greater than investment in China
oil profits in the Middle East and Russia
o surge in savings lowered interest rates which
lead to investments that were unproductive and
reduction of Fed’s control of economy
o U.S. absorbed an estimated 75% of excess
world 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
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