University:
California State University, Northridge
Course:
ECON 405 | International Trade
Academic year:

2024
Views:

262

Pages:

18
Author:

Addison Wallace

Topic 6 National Income Accounting and the Balance of Payments Part 3 How Do the Balance of Payments Accounts Balance? • Due to the double entry of each transaction, the BOP accounts will balance by the following equation: current account + capital account + financial account = 0 12-43 How Do the Balance of Payments Accounts Balance? (cont.) • Recall that the CA measures the size and direction of international borrowing. • CA + capital account = ∆net foreign assets • CA + capital account = -financial account ♦ E.g., a country must finance its CA deficit by borrowing from foreigners (i.e., selling financial or intangible assets). 12-44 Balance of Payments Accounts • The 3 broad accounts are more finely divided: • Current account: imports and exports a. goods (like consumer electronics or cars) b. services (payments for legal services, shipping services, tourists’ expenditures, etc.) c. income receipts (interest and dividend payments, earnings of firms and workers operating in foreign countries) • Current account: net unilateral transfers ♦ gifts (transfers) across countries; payments that do not correspond to the purchase of any good, service, or asset. 12-45 Balance of Payments Accounts (cont.) • Capital account: records special transfers of assets (typically non-market, non-produced, or intangible assets like debt forgiveness, copyrights, and trademarks), but this is a minor account for the U.S. ♦ In 2006, U.S. capital account = -$3.9 billion. • Why are “net unilateral transfers” placed in the current account instead of the capital account? ♦ Distinguish between “net unilateral transfers” (gifts) which impact a country’s income and “non-market transfers” (like debt forgiveness) which impact a country’s balance sheet. 12-46 Balance of Payments Accounts (cont.) • Financial account: the difference between sales of domestic assets to foreigners and purchases of foreign assets by domestic citizens. • Financial inflow (or capital inflow) ♦ Foreigners loan to domestic citizens by buying domestic assets ♦ Domestic assets sold to foreigners are a credit (+) because the domestic economy acquires money during the transaction • Financial outflow (or capital outflow) ♦ Domestic citizens loan to foreigners by buying foreign assets ♦ Foreign assets purchased by domestic citizens are a debit (-) because the domestic economy gives up money during the transaction 12-47 Balance of Payments Accounts (cont.) • Financial account has at least 3 subcategories: 1. Official (international) reserve assets 2. All other assets 3. Statistical discrepancy 12-48 Balance of Payments Accounts (cont.) • Statistical discrepancy ♦ Data from a transaction may come from different sources that differ in coverage, accuracy, and timing. ♦ The BOP accounts therefore seldom balance in practice. ♦ The statistical discrepancy is the account added to or subtracted from the financial account to make it balance with the CA and capital account. 12-49 Balance of Payments Accounts (cont.) • Official (international) reserve assets: foreign assets held by central banks to cushion against financial instability. ♦ Assets include gov. bonds, currency, gold, and accounts at the IMF. ♦ Official reserve assets sold to foreign central banks are a credit (+) because the domestic central bank can spend more money to cushion against instability. ♦ Official reserve assets purchased by the domestic central bank are a debit (-) because the domestic central bank can spend less money to cushion against instability. 12-50 Balance of Payments Accounts (cont.) • Balance of official reserve transactions = net increase in foreign official reserve claims on domestic assets – net increase in official reserves held by the domestic central bank. • The negative value of the balance of official reserve transactions is called the official settlements balance or “balance of payments.” ♦ It is the sum of the current account, the capital account, the non-reserve portion of the financial account, and the statistical discrepancy. ♦ It indicates the payments gap that official reserve transactions need to cover. 12-51 Balance of Payments Accounts (cont.) • A negative “balance of payments” (a deficit) may indicate that a country: ♦ is depleting its international reserve assets or ♦ incurring large debts to foreign central banks. • If a country faces the risk of being suddenly cut off from foreign loans, it will want to maintain a “war chest” of international reserves as a precaution. ♦ Developing countries are sometimes in this position. 12-52 Table 1: U.S. Balance of Payments Accounts for 2006 (billions of $) U.S. must cover its current + capital account deficit with a net financial inflow (via net borrowing or sales of assets to foreigners) of $815.4 billion. Table 1 (cont): U.S. Balance of Payments Accounts for 2006 (billions of $) Reserves sold by the Fed Reserves purchased by foreign central banks U.S. “balance of payments” = -$442.7 billion = - [$440.3 billion + $2.4 billion] Roughly half of the U.S. current + capital account deficit was financed by foreign central banks. U.S. Balance of Payments Accounts • U.S. has the most negative net foreign wealth in the world, and is therefore the world’s largest debtor nation. • In 2006, U.S. net foreign wealth was estimated at -$2,539.6 billion. ♦ By contrast, total foreign debt owed by all Central and Eastern European countries was about $750 billion in 2006. ♦ U.S. debt is just under 20% of GDP. • And its CA deficit in 2006 was $812 billion, so net foreign wealth continued to decrease. 12-55 U.S. Balance of Payments Accounts (cont.) U.S. 1976 2006 Foreign assets 25% 104% Liabilities 16% 123% Note: figures expressed as a percentage of GDP. • The value of foreign assets held by the U.S. has grown since 1980, but liabilities of the U.S. (debt held by foreigners) has grown more quickly. 12-56 Fig. 3: U.S. Gross Foreign Assets and Liabilities, 1976-2006 Source: U.S. Department of Commerce, Bureau of Economic Analysis, June 2007 U.S. Balance of Payments Accounts (cont.) • About 70% of foreign assets held by the U.S. are denominated in foreign currencies and almost all of U.S. liabilities (debt) are denominated in dollars. • Changes in the exchange rate influence the value of net foreign wealth (gross foreign assets minus gross foreign liabilities). ♦ Appreciation of the value of foreign currencies makes foreign assets held by the U.S. more valuable, but does not change the dollar value of dollar-denominated debt for the U.S. 12-58 U.S. Balance of Payments Accounts (cont.) • E.g., a 10% depreciation in the dollar would leave U.S. liabilities unchanged but would increase U.S. assets (measured in dollars) by $964 billion (or 7.3% of GDP). • So should policy makers ignore their CA deficits and try to devalue their currency and thereby reduce foreign debt? ♦ No, such efforts would reduce foreign demand for domesticcurrency assets. 12-59

National Income Accounting and the Balance of Payments, Part 3

Related Documents

Recommended Documents

Description

Related Documents

Free up your schedule!

Take 5 seconds to unlock