Balance of Payments

The balance of payments (BOP) is a record of one country's transactions with the rest of the world in a given year. These transactions involve individuals, business firms, the government, and other groups. When a transaction causes money to enter a country, this money is called an inflow. Inflows appear on the country's BOP as a positive number, or credit. When a transaction causes money to exit a country, this is called an outflow. Outflows appear on the country's BOP as a negative number, or debit.

The combined credits and debits shown on a country's BOP statement should be equal during each reporting period. International transactions are counted twice, once as an outflow from a country and once as in inflow to a second country—a process referred to as the double-entry accounting system. The main categories of transactions include the country's current account, capital account, and financial account. Often the data for the capital and financial accounts are combined. Table 11.2 summarizes the BOP for the United States in 2012.[1]

The current account deals with a country's international trade in merchandise and services, net investment income, and unilateral transfers. In 2012, for example, U.S. Bureau of Economic Analysis (BEA) reported a U.S. merchandise trade deficit of $741.5 billion. Thus, it is recorded as a debit because it represents an outflow of U.S. dollars to other countries. In that same year, however, the United States recorded a trade surplus in services totaling $206.8 billion, which is recorded as a credit because it represents an inflow of foreign currencies into the U.S. economy. Note that the BEA trade data shown in Table 11.2 is slightly different from the World Trade Organization's data shown earlier in this chapter. Net investment income, which consists of interest and dividends payments that cross national borders, was also a credit as money inflows into the United States outweighed outflows by $223.9 billion. Net unilateral transfers, such as U.S. foreign aid and gifts by Americans to foreigners, were recorded as a $129.7 billion debit in 2012. The U.S. current account deficit of $440.4 billion in 2012 is shown in Table 11.2.

The capital account includes a variety of capital transfers between countries. For example, money or other property that migrant or temporary workers carry across a national border represents a capital outflow from the country of departure and an inflow to the country the worker is entering. Inflows and outflows of capital can also result from crossborder sales or purchases of patents, copyrights, and undeveloped properties. In 2012 the

Table 11.2 U.S. Balance of Payments, 2012 ($ billions)

Source: Bureau of Economic Analysis, “Table 1,” News Release, June 14, 2013; BEA and WTO trade data differ slightly; some rounding.

capital account in the United States recorded a $7 billion surplus, which shows as a credit of $7 billion.

The financial account records the cross-border sale or purchase of assets. Some of the main categories of traded assets include corporate stocks and bonds, government securities, and long-term foreign direct investment (FDI) in other countries—including money spent on mergers and acquisitions (M&As) and on the construction of new production facilities by transnational corporations. In 2012 the United States had a $439.4 billion surplus in its financial account. Finally, a statistical discrepancy (-$5.9 billion) is figured into the BOP statement. A statistical discrepancy results mainly from unreported cross-border transactions and inconsistencies in accounting procedures in the global economy.

The BOP receives significant media attention in the United States mainly because of the growing current account deficits. From 1960 to 2012 the U.S. current account has been in surplus 18 times, mainly during the 1960s and 1970s. It has been in deficit 34 times, mainly since the 1980s. In fact, the U.S. current account has been in surplus just three times since 1980. Massive merchandise trade deficits have accounted for the lion's share of recent current account deficits. From 2000 to 2012 the average current account deficit was $545 billion per year.[2]

  • [1] DOC/BEA, “U.S. International Transactions (2012),” News Release, June 14, 2013
  • [2] Ibid.; and Council of Economic Advisors, “Table B-103: U. S. International Transactions, 1953– 2012,” Economic Report of the President, 2013, 442.
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