Chapter 1 The Balance-of-Payments
Unit 3
LEARNING OUTCOMES 学习效果:
At the end of this lecture, students should be able to
understand the concepts of International investment position
interpret partial balances in U.S. BOP
examine the macro meaning of a current account deficit
FOCUS AND DIFFICULTIES 知识重难点:
Focus: International investment position, a net debtor/creditor nation,
Difficulties: net foreign investment and the current account balance
LECTURE VIDEO 授课视频:
LEARNING OUTLINE 学习大纲:
1. Facts about U.S. balance-of-payments
a. As a result of an excess of imports over exports of goods, services,income flows and current transfers over time, U.S. always had a current account deficit.
b. U.S. consistently faced merchandise trade deficits in recent decades.
1) Some empirical research suggest that merchandise trade deficits would worsen the country's terms-of-trade(TOT).
2) With a trade deficit, the U.S. dollar depreciates in foreign exchange market because the supply of dollars exceed the demand for dollars in foreign exchange markets, due to US imports exceeding US exports. Foreign currencies become more expensive in terms of dollars so that imports would become more costly to U.S. residents.
3) Besides, a trade deficit may generate higher unemployment in some industries such as steel or autos. For example, because of higher import costs on imported steel, US local auto producers had to raise the selling price and then its export sales would decline, by the end more U.S. workers would lost jobs.
4) However, in other industries, the employment situation is different. Since U.S. dollar depreciates, the U.S. dollar-denominated financial assets would become cheaper and foreign investors would turn to U.S. Such an capital and financial inflows would generate employment in other industries, such as financial securities and real estate investment industries.
c. U.S. consistently generated a surplus in services account in recent decades because of its competitive advantage in service categories.
d. U.S. current account deficit is financed by a net U.S. borrowing (financial inflow) from abroad.
1) U.S. current account deficit indicates its expenditures for foreign g&s are greater than the income received from sales of its own g&s, including net income flows.
2) If foreigners purchase more U.S. assets in the U.S. (such as land, buildings, businesses, stocks and bonds), then the U.S. can afford to import more goods and services from abroad.
2. Meaning of current account balance
a. Taken as a whole, U.S. international transactions always balance.Any force leading to an increase or decrease in one BOP account leads to exactly offsetting changes in balances of other accounts. In other words, BCA+BKA+BFA+SD=0.
| Partial balances for U.S. 2021 Q3 | dollars, million |
| Goods and Services Balance | -224,964 |
| Income balance | 10,189 |
| Balance on current account (BCA) | -214,775 |
| Balance on capital account (BKA) | 3,006 |
| Balance on financial account (BFA) | 127,213 |
| Statistical discrepancy (SD) | 84,556 |
1) To finance current account deficit, a nation can sell financial assets to foreigners, or borrow from foreigners, which involves a net financial inflow. In this case, the home nation is a net demander/borrower for funds from abroad and decreasing its net foreign investment position.
2) To offset current account surplus, a nation can buy foreign financial assets, or lend to foreigners, or repay the liabilities owed to foreigners, which has a net financial outflow. In this case, the home nation is a net supplier/lender of funds to the rest of the world and improving its net foreign investment position.
b. To conclude, the current account balance is synonymous with net foreign investment.(BCA=)
1) Net foreign investment records net flows of a nation's assets and liabilities, and equals to changes in a nation's foreign financial assets minus changes in a nation's liabilities to foreigners during a period of time.
2) If the country has a current account surplus, then its foreign assets are growing faster than its foreign liabilities. The country's net foreign investment is positive—it is acting as a net supplier/lender to the rest of the world;
3) If the country has a current account deficit, then its foreign liabilities are growing faster than its foreign assets. The country's net foreign investment is negative—it is acting as a net demander/borrower from the rest of the world.
c. In Macroeconomics, we have the identity: national saving=total investment(S=I); while total investment is composed of domestic investment and investment abroad(I=+
). Thus, rearrange the identity, BCA=S-
. It indicates that the government can encourage national saving or reduce domestic investment to improve the current account balance.
d. Moreover, since the majority of current account balance is resulted from goods and services balance. We can approximatelly express the current account balance as the net exports of goods and services, which is part of GDP (BCA≈NX). Since Y=C++G+NX, BCA=Y-(C+
+G)=Y-E, where E is defined as the total of C+
+G. It demonstrates that the government can improve domestic production, or discurage domestic expenditures to improve the current account balances.
e. In the preceding section, we found that the current account deficits can be financed by the capital and financial inflows. Actually the process can work in the other way as capital and financial flows initiating changes in the current account.
◆ Suppose that an increase in the U.S. interest rate relative to interest rates abroad attract capital inflows for U.S. Capital inflows keep dollar stronger than it would be, boosting imports and suppressing exports, thus leading to a current account deficit.
3. International Investment Position
a. International Investment Position is a statistical statement that shows at a point in time the value of a nation's holdings of foreign financial assets and the value of a nation's liabilities owed to foreigners. (refer to the U.S. International Investment Position in 2022Q3, attached the following file.)
b. The difference between the assets and liabilities is the net position in the IIP and represents either a net claim on or a net liability to the rest of the world.
◆ The accumulated value of US assets abroad was always smaller than the accumulated value of US liabilities to foreigners for recent decades. Hence, the net international investment position of the U.S. was negative for recent decades. In this case, we consider U.S. as a net debtor nation.
◆ In comparison, the net position of China was positive; hence, China is regarded as a net creditor nation. (refer to the China's International Investment Position in 2022, attached the following file.)
