Econ 3104 International Macroeconomics

The Balance of Payments

Lecturer: Scott French Reading: KOM Ch. 13

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Balance of Payments Accounts

• The record of a country’s payments to and receipts from foreigners.

• Separated into 3 broad accounts:

– Current account: records transactions involving goods and services (imports and exports).

– Financial account: records transactions involving financial assets.

– Capital account: records other activities resulting in transfers of wealth (like debt forgiveness).

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Balance of Payments Accounts

• Each transaction enters the accounts twice.

– Once as a credit (+) and once as a debit (-).

• “Follow the money”:

– A payment to foreigners results in a debit (-).

– A receipt from foreigners results in a credit (+).

• By definition, the balance of payments accounts will always balance.

current account + financial account + capital account = 0

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Example

• You import a $30 DVD of Japanese anime by using your debit card.

• The money is transferred to the producer’s bank account in Sydney.

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Transaction Account Credit Debit

Example

• You invest in the Japanese stock market by buying $500 Sony shares.

• You give cash to the Bank of Tokyo, which deposits yen in the account of the seller of the shares.

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Transaction Account Credit Debit

Example

• ANZ bank forgives a $100 M debt owed by the government of Greece.

• ANZ credits Greece’s loan account to reduce the debt.

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Transaction Account Credit Debit

Australia’s Balance of Payments Accounts

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Current Account -38,406 Exports 323,042

Goods 232,394 Services 51,688

Income Receipts 38,960

Imports -360,570 Goods -213,098

Services -55,747 Income payments -91,725

Net Unilateral Transfers -878

Capital Account -418 Financial Account 38,489

Acquisition of Assets -89,284 Incurrence of Liabilities 129,820 Official Reserves, net -350 Financial Derivatives, net -1,697

Net Errors and Omissions 335 Source: Australian Bureau of Statistics Millions of $AU

Errors and Omissions

• Why do the account balances not sum to zero?

– Data about transactions comes from different sources with different levels of accuracy.

• The discrepancy is typically added to the financial account.

– But, there is no way of knowing where it actually belongs.

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Official International Reserves

• Official international reserves

– Foreign assets held by central banks.

– Thought of as a cushion against financial instability.

– Examples: currency, gold, government bonds, deposits at the IMF

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Official International Reserves

• Official foreign exchange intervention:

– The buying and selling of foreign assets by a central bank.

– Affects the financial account in the same way as a private financial transaction.

• The level of net central bank financial flows is the official settlements balance.

– Often called the balance of payments.

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Official Settlements Balance

• Why pay attention to the official settlements balance?

– A negative balance could indicate a crisis.

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US Balance of Payments Accounts

• The US is the world’s largest debtor nation.

• From 1980-1988, the US moved from the world’s largest creditor to the world’s largest debtor nation.

• US net wealth is highly influenced by exchange rates.

– Nearly all of US foreign liabilities are denominated in dollars.

– Only about 30% of US foreign assets are denominated in dollars.

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US Foreign Assets and Liabilities

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Summary

1. The balance of payments accounts record flows of goods & services and flows of financial assets across countries.

– The are three accounts – current account, capital account, and financial account – which balance each other.

– Transactions of goods and services appear in the current account; transactions of financial assets appear in the financial account.

2. Official international reserve assets are a component of the financial account which records official assets held by central banks.

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Summary

3. The official settlements balance is the value of net central bank financial flows, and it shows changes in a central bank’s holdings of foreign assets relative to foreign central banks’ holdings of domestic assets.

4. The U.S. is the largest debtor nation, and its foreign debt continues to grow because its current account continues to be negative.

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