Chapter 12 – The Balance of Payments
Balance of Payments (BP)
is an accounting record (using double entry bookkeeping)
of a country’s trade in goods, services and financial assets with the rest of the world
(ROW), over some time period - monthly, quarterly, or annually.
In U.S., BP is
calculated by the Dept. of Commerce monthly, See Table 12.1 on p. 317-318 (detailed),
and Table 12.2 on p. 318 (simplified).
Credit entries (+) represent receipts (+CFs) of foreign exchange, e.g., from exports of
merchandise or services, income to employees, income from foreign investments, direct
foreign investment by foreign MNCs, and sale of U.S. financial assets to foreigners.
Debit entries (-) represent payments (-CFs) of foreign exchange, e.g., from imports of
merchandise and services, payments to employees, income payments to foreign
investors, direct foreign investment by U.S. MNCs, and the purchase of financial assets.
Every transaction is double-entry bookkeeping.
If Boeing exports a $50m 747 airplane
to Japan, and allows 90 days credit, there will be a $50m credit for merchandise (X),
and a $50m debit for the capital account.
If Boeing imports a $2m engine from Rolls
Royce in the U.K. and pays cash, there will be a $2m debit for merchandise (M) and a
$2m credit for the capital account for the $2m deposit at a NY bank account kept by
Overall, double-entry bookkeeping requires that all transactions on net will balance, and
the BP = 0.
However, for particular accounts (or for particular countries) there can be a
(Credits > Debits, like X > M) or a
(Debits > Credits, like M > X).
example, the U.S. usually has a trade deficit for merchandise, a trade surplus for
services (see p. 318), and an overall trade deficit for the
On net, the
current account deficit would have to be offset by a Capital Account surplus, see Table
12.2 (p. 318).
The Current Account deficit of -$410B is almost exactly offset by the
$410B Capital Account surplus.
We also have various trade balances and trade surpluses with individual countries –
currently we have
with Japan, China, Germany, Mexico and
with Netherlands, Singapore, Australia, Belgium, and Hong Kong, even
though we have an
overall trade deficit
with the ROW.
Merchandise trade deficits with individual countries or with the ROW, are not
necessarily bad, especially when we consider that a trade surplus for capital necessarily
follows from a merchandise trade deficit.
Also, countries don’t “trade,”…
January 23, 2012