Economics of Foreign Exchange: Balance of Payments

The International Balance of Payments When the United States runs a balance of trade deficit, foreign saving in the United States must increase. We can now examine the financial relations between the United States and the rest of the world to show how the balance of trade deficit is equal to the net increase in foreign saving in the United States over any given period. A nation's international balance of payments is a statement showing the net exchange of that nation's currency for foreign currencies from all transactions between that nation and foreign nations in a given year. For example, the U.S. balance of payments statement shows the number of dollars supplied for all foreign transactions and the number of dollars demanded by all foreign nations. The actual number of dollars purchased by foreigners must always equal the actual number sold over the year. The international transactions reported in the balance of payments accounts include exports and imports of goods, transactions for foreign services (including expenditures of dollars abroad by U.S. travelers), purchase of foreign shipping and insurance services, and transactions involving the exchange of financial and other assets. The Current Account The table in Box 8 shows the U.S. balance of payments accounts in 1988. The current account summarizes the transactions involving international exchange of goods and services purchased during the year and other miscellaneous transactions, including unilateral transfers and military transactions. A plus sign indicates that the transaction earned U.S. sellers the equivalent amount of dollars in foreign ex-change. A minus sign indicates a transaction in which the dollar equivalent in foreign exchange was supplied by U.S. buyers to foreigners. Lines 1 and 2 of the table show the dollar value of exports and imports of merchandise in 1988. These figures indicate transactions for only merchandise, not for services. Line 3 shows the balance of trade, which is the difference between the dollar value of merchandise exported by American firms and U.S. imports of foreign-produced goods. The balance of trade gets the most attention in the press because of its impact on industrial employment in the United States. In 1988 exports of merchandise by U.S. firms didn't earn enough money to balance the imports of foreign goods by Americans. The balance of trade deficit in that year was $127.2 billion. In 1975, on the other hand, the dollar value of U.S. exports exceeded the dollar value of U.S. imports-the United States had a balance of trade surplus of nearly $9 billion. Because international trade transactions also involve receipt and payment of interest and investment income during the year and the exchange of services, the balance of trade provides an incomplete picture of the U.S. net inflow and outflow of current payments. For example, as shown on line 4 of the table, net investment income in 1988 from international transactions was $2.2 billion, the amount by which receipts from U.S. investments abroad exceeded payments to foreign investors in the United States. Lines 5, 6, and 7 of the table show other service transactions, including those for travel and transportation. The balance of goods and services on line 8 indicates that when international transactions for services are added to those for merchandise, Americans supplied $111.9 billion more to foreigners than foreigners supplied in the dollar equivalent of foreign currency to the United States. Payments for pensions, remittances, and other unilateral transfers or funds, such as gifts and foreign aid, shown on line 9 amounted to $14.7 billion in 1988. The balance on current account of the balance of payments shown on line 10, which includes transactions involving services, investment income, and transfers, is roughly equal to U.S. net exports as measured by the National Income and Product Accounts.3 In 1988, the United States had a deficit on current account of $126.5 billion. Americans supplied foreigners with that many more dollars than foreigners supplied to the United States in foreign exchange for American goods and services and as interest or investment income that year. The graph in Box 9 shows the U.S. merchandise trade balance (balance of trade) and the current account balance from 1950 to 1988. The balance of trade has been in deficit every year since 1975. Except for a short period in the late 1970s and early 1980s, the current account has also been consistently in deficit since 1975.