BALANCE OF PAYMENTS

Updated January 21, 1999

U. S. 1997 BALANCE OF PAYMENTS ($ billions) "The 18 Balances"

A. CURRENT ACCOUNT

GOODS
Exports = 576
(-) Imports = 749
[1] Trade Balance = -173
[2] Balance of Trade = -173
[3] Trade Surplus = -173
[4] Trade Deficit = 173
SERVICES
Exports = 210
(-) Imports = 142
[5] Balance on Services = 68
[6] Services Surplus = 68
INVESTMENTS (ROW=Rest of World)
U.S. Income from Investments in ROW =183
(-) ROW Income from Investments in U.S. = 191
[7] Investment Income Balance = -8
[8] Net Investment Income = -8
[9]Balance on Goods & Services & Investment Income = -113
(+) Net Unilateral Transfers = -35
[10] Balance on Current Account = -148
[11] Current Account Surplus = -148
[12] Current Account Deficit = 148
B. CAPITAL ACCOUNT
(i) Net Change in Total U.S. Assets in Row = 308
(ii) Net Change in ROW Assets in U.S. = 456
[13]Balance on Capital Account = 148
[14] Capital Account Surplus = 148
[15] Capital Inflow = 148
[16] Capital Outflow = -148
[17] NFI = Net Foreign Investment = -148
C. BALANCE OF PAYMENTS
Bal. on Current Acct. + Bal. on Capital Acct.
=[18] Balance of Payments = 0
NOTES:
(1) The Balance of Payments always equals zero which is another way of saying "the Balance of Payments always balances." There is, however, a "statistical discrepancy" which is usually included in the total for "Net Change in ROW assets in U.S."
(2)Net Unilateral Transfers consists of gifts we got minus gifts we gave. If it is negative, then we are a generous, giving nation. Unilateral transfers are gifts by residents on one country to residents of another country.

EXAMPLE # 1

Goods:
Exports= 500
Imports = 650
Services:
Net Exports = 80
Investments:
Income from Row = 200
Payments to ROW = 250

Net Unilateral Transfers = -75 Find the following (answers are in Column 2)

Balance of Trade	-150
Balance on Goods & Services	-70
Trade deficit	150
Services Surplus	80
Balance on Goods & and Services & Investment Income	-120
Balance on Current Account	-195
Current Account Deficit	195
Balance on Capital Account	195
Capital Inflow	195
Capital Outflow	-195
Net Foreign Investment (NFI)	-195
Balance of Payments	0

Notes:
Net Exports = Exports - Imports
"Balance" = "surplus"
deficit = - surplus
surplus = - deficit
capital inflow = balance on capital acccount
capital outflow = - capital inflow

EXAMPLE # 2

Net Exports of Goods & Services = -90
Net Investment Income Balance = 175
Net Unilateral transfers = -80

Find the following (answers are in Column 2):

Balance of Current Account	5
Balance on Capital Account	-5
Capital Inflow	-5
Capital Outflow	5
Net Foreign Investment (NFI)	5
Balance of Payments	0

EXAMPLE # 3

(i) Net Change in Total U.S. Assets in Row = 300
[increase = capital outflow (-)]
(ii) Net Change in ROW Assets in U.S. = 200
[increase = capital inflow (+)]

Find the following (answers are in Column 2):

Balance of Current Account	100
Current Account Surplus	100
Current Account Deficit	-100
Balance on Capital Account	-100
Capital Inflow	-100
Capital Outflow	100
Net Foreign Investment (NFI)	100
Capital Account Surplus	-100
Capital Account Deficit	100

Notes (useful for Chapter 4 essay question #9):

Synonyms for capital account balance: Capital account surplus; capital inflow; current account deficit
Synonyms for current account surplus: balance on current account; capital outflow; Net Foreign Investment; capital account deficit

COMMENT

The net change in total U. S. assets in the ROW can be positive, negative, or zero. It will be positive if we sold some assets but bought more than we sold in which case we have to send the capital funds over to the ROW -- we will have a capital outflow or you can say the capital inflow will be negative in terms of our purchases/sales of our assets in the ROW.

Likewise, the net change in ROW assets in the U.S. can be positive, negative, or zero. It will be positive if they sold some assets in the U. S. but bought more than they sold in which case they will have a capital outflow which, to us, will be a capital inflow.

Example #4

net change in total U. S. assets in ROW = 50
capital outflow = 50 or capital inflow = -50
net change in ROW assets in U. S. =300
to ROW: capital outflow =300 and capital inflow = -300
to us, however: capital inflow = 300
overall, our capital inflow is 300 - 50 = 250
balance on capital account = 250
balance on current account = -250

Example #5

net change in total U. S. assets in ROW = -200
capital inflow = 200
net change in ROW assets in U. S. =300
to ROW: capital outflow =300 and capital inflow = -300
to us, however: capital inflow = 300
overall, our capital inflow is 200 + 300 = 500
balance on capital account = 500
balance on current account = -500

Example #6

net change in total U. S. assets in ROW = - 75
capital inflow = 75
net change in ROW assets in U. S. = -250
to ROW: capital inflow = 250
to us, however: capital inflow = - 250
overall, our capital inflow is 75 - 250 = -175
balance on capital account = -175
balance on current account = 175

SUMMARY STATEMENT

Balance on capital account is equal to the net change in total ROW assets in U.S. MINUS net change in total U.S. assets in ROW

SUMMARY TABLE For Example #3

100 Balance on Current Account

100 Current Account Surplus

100 Capital Outflow

100 Net Foreign Investment

100 Capital Account Deficit

-100 Balance on Capital Account

-100 Capital Inflow

-100 Current Account Deficit

-100 Capital Account Surplus

Key Equations:
Net Foreign Investment = Capital Outflow
Net Foreign Investment = Balance on Current Account
Balance of Current Account = Capital Outflow
Balance on Capital Account = Capital Inflow
Current Account Deficit = Capital Inflow

Page created May 25, 1998