360-12 - Chapter 12 The Balance of Payments Balance of...

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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 RR. 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 surplus (Credits > Debits, like X > M) or a deficit (Debits > Credits, like M > X). For 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 Current Account . 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 trade deficits with Japan, China, Germany, Mexico and trade surpluses with Netherlands, Singapore, Australia, Belgium, and Hong Kong, even though we have an overall trade deficit with the ROW. Note: 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 1
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A proper understanding of the economics of trade balances, BP, etc., allows for a better evaluation of public policy. CURRENT ACCOUNT Merchandise – trade (export and import) of finished goods, commodities, raw materials, parts, minerals, food products, clothing, vehicles, etc.
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This note was uploaded on 01/23/2012 for the course ECON 360 taught by Professor Staff during the Spring '11 term at University of Michigan.

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360-12 - Chapter 12 The Balance of Payments Balance of...

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