Chapter 1 The Balance-of-Payments
Unit 2
LEARNING OUTCOMES 学习效果:
At the end of this lecture, students should be able to
understand three major parts of a country's balance-of-payments
examine various subaccounts under current account, capital and financial account
demonstrate an ability to obtain and process the data of U.S. BOP and China's BOP, and generate the required information
FOCUS AND DIFFICULTIES 知识重难点:
Focus: the structure of the balance of payments by considering its current account, capital and financial account
Difficulties: subaccounts underlying current account, capital and financial account,
LECTURE VIDEO 授课视频:
LEARNING OUTLINE 学习大纲:
1. The balance-of-payments consists of current account, capital and financial account, and statistical discrepancy.
2. Current Account
a. The current account shows the monetary value of international flows of goods, services, primary income, and secondary income (unilateral transfers) between residents and nonresidents.
b. Merchandise trade includes all goods the country exports or imports.
c. Combining the exports and imports of goods gives the merchandise trade balance.
1) U.S. Exports of goods: $441,594 million, U.S. Imports of goods: $716,421 million, hence, U.S. experienced a merchandise trade deficit of $274,827 million in third quarter, 2021.
2) China Exports of goods: $828,719 million, China Imports of goods: $692,688 million, hence, China experienced a merchandise trade surplus of $136,031 million in third quarter, 2021.
d. Adding up all the items for exports and imports of goods and services gives the goods and services balance, which is part of a country's GDP.
1) U.S. Exports of services: $190,829 million, U.S. Imports of services: $140,966 million, the balance on services: $49,863 million; hence, U.S. experienced a g&s trade deficit of $224,964 million in third quarter, 2021.
2) China Exports of services: $87,240 million, China Imports of services: $119,162 million, the balance on services: -$31,922 ; hence, China experienced a g&s trade surplus of $104,109 million in third quarter, 2021.
e. Primary income records the flows of investment income (dividends, interest, profits to owners) and compensation of employees.
1) Income receipts (CR.): earnings (interest, dividends, and profits) from investment made abroad
2) Income payments (DR.): payments to foreign investors, compensation to short-term foreign workers in the reporting country
f. Secondary income records current/unilateral transfers---"gifts" (g&s, cash and other financial assets) that the country makes and receives.
1) Private transfer: gifts made by individuals and nongovernmental institutions to foreigners.
2) Governmental transfer: gifts made by one government to foreign residents or foreign governments.
g. The current account balance shows the difference between the sum of exports and income receivable and the sum of imports and income payable (exports and imports refer to both goods and services, while income refers to both primary and secondary income).
3. Capital Account
a. The capital account shows credit and debit entries for nonproduced nonfinancial assets and capital transfers between residents and nonresidents.
b. Acquisition(DR.)/disposal(CR.) of certain nonproduced, nonfinancial assets include purchases and sales of rights to natural resources and contracts, leases, and licenses, and marketing assets.
c. Capital transfer includes debt forgiveness, nonlife insurance claims resulting from catastrophic events, and investment grants.
4. Financial Account
a. The financial account records transactions that involve financial assets and liabilities and that take place between residents and nonresidents.
b. The current and capital accounts show transactions in gross terms. In contrast, the financial account shows transactions in net terms, which are shown separately for financial assets and liabilities. The financial account shows net acquisition(DR.) of financial assets and net incurrence(CR.) of liabilities.
c. Net acquisition of financial assets can be labeled net changes in financial assets. An increase in the reporting country's holdings of foreign financial assets is considered one capital(financial) outflow, leading to home country's payments to foreigners. It can be regarded as a debit item. Conversely, a decrease in the reporting country's holdings of foreign financial assets is considered a credit item.
d. Similarly, net incurrence of liabilities can be called net changes in liabilities. An increase in the reporting country's liabilities to foreigners is considered one capital(financial) inflow, leading to the home country's receiving funds from foreigners. It can be regarded as a credit item. Conversely, a decrease in the reporting country's liabilities to foreigners is considered a debit item.
e. The financial account is classified according to the instrument and functional categories: Direct Investment, Portfolio Investment, Financial derivatives, Other Investment, and Reserve assets. Those transaction are recorded by applying a plus sign (credit) to capital(financial) inflow and a minus sign (debit) to capital(financial) outflow.
1) Direct investment is a category of cross-border investment associated with a resident in one economy having control (stock ownership of 10% or more) or a significant degree of influence on the management of an enterprise that is resident in another economy.
e.g. Coca-Cola builds one plant in Japan. It is a debit item (DR.) in U.S. BOP.
2) Portfolio investment is defined as cross-border transactions and positions involving debt or equity securities, other than those included in direct investment or reserve assets.
e.g. A U.S. resident purchases securities of Toyota. It is a debit item(DR.) in U.S. BOP.
3) Financial derivatives(other than reserves) consist of cross-border transactions arising from financial contracts that are linked to underlying financial instruments, commodities, or indicators, such as options, forwards.
4) Other investment is a residual category that includes currency and deposits, loans, insurance technical reserves, and trade credit and advances.
e.g. Citibank makes a loan to a Mexican enterprise. It is debit item(DR.) in U.S. BOP.
5) Reserve assets are those external assets that are readily available to and controlled by monetary authorities for meeting balance of payments financing needs, for intervention in exchange markets to affect the currency exchange rate, and for other related purposes (such as maintaining confidence in the currency and the economy, and serving as a basis for foreign borrowing).
a) Reserve assets consist of monetary gold, SDR holdings, reserve position in the IMF, currency and deposits, securities (including debt and equity securities), financial derivatives, and other claims (loans and other financial instruments).
b) Monetary gold is gold to which the monetary authorities have title and is held as reserve assets.
c) SDRs are international reserve assets created by the IMF and allocated to members to supplement existing official reserves. SDR holdings represent unconditional rights to obtain foreign exchange or other reserve assets from other IMF members.
Video: Explaining SDRs (Special Drawing Rights)
d) Reserve position in the IMF is the sum of (a) the "reserve tranche", that is, the foreign currency (including SDRs) amounts that a member country may draw from the IMF at short notice; and (b) the reporting country's lending to the IMF under the loan agreement.
e) Foreign exchange reserves are the financial assets of the central banks and monetary authorities that are held in foreign currencies and which are used to back its liabilities, including currency and deposits, securities (including debt and equity securities), financial derivatives, and other claims (loans and other financial instruments).
Refer to China's official reserve assetes, attached the file:
U.S. reserve assets is available at the following internet site: U.S. reserve assets
5. Although the balance of payments accounts are, in principle, balanced, imbalances result in practice from imperfections in source data and compilation. The correcting entry, Statistical Discrepancy is added to make the accounts balance.
