The Balance Of Payments

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23.11. (a) What is a nation's balance of payments? What is its purpose?

(b) What are the three main accounts in the balance of payments? What does each measure?

(c) How are credits and debits entered into the current and capital accounts?

(a) A nation's balance of payments is a summary record of all the transactions of a nation with the rest of the world during a calendar year. Its main purpose is to inform government authorities of the nation's international position and to help them formulate monetary, fiscal, and commercial policies.

(b) The three main accounts of the balance of payments are the current account, the capital account, and the official reserve account. The current account shows the flows of goods, services, and government grants between the nation and the rest of the world. The capital account shows the flows of investments and loans between the nation and the rest of the world. The official reserve account shows the change in the nation's official (i.e., government) reserves and liabilities needed to balance the current and capital accounts.

(c) All economic transactions that lead to the United States receiving payments from abroad are entered as credits (+) in the current and capital accounts. Thus, exports of goods and services and investments and loans received from abroad (i.e., capital inflows) are entered as credits. All transactions that lead to payments to foreigners are entered as debits (-). U.S. imports of goods and services, government grants made to foreigners, and investments and loans made to foreigners (i.e., capital outflows) are entered as debits.

23.12. (a) How is a deficit or surplus in a nation's balance of payments measured? How is it settled? What is the function of the statistical "discrepancy"?

(b) How did the deficit in the U.S. balance of payments arise in 1992?

(a) If the sum of all the debits in the current and capital accounts exceeds the sum of all the credits in these accounts, the nation has a deficit in its balance of payments equal to the difference. This is settled out of the nation's official (i.e., government) reserves or by foreign surplus nations increasing their holdings of the deficit nation's currency. The latter form of settlement represents a future claim on the deficit nation. The opposite is true for a surplus. The function of the statistical "discrepancy" is to balance the total credits with the total debits of all three accounts taken together. For example, if the total credits in the official reserve account exceeded the sum of the total net debits in the current and capital accounts (so that the nation had a deficit), a discrepancy equal to the difference is entered at the end of the capital account as a debit (representing mostly unreported capital outflows).

(b) During 1992, the U.S. exports of goods and services fell short of its imports of goods and services and net government grants by $67 billion (see Table 23-2). On the other hand, capital inflows in the form of investments and loans received by the United States from abroad exceeded U.S. capital outflows in the form of U.S. investments and loans made abroad by $36 billion. This together with a (debit) discrepancy of - $12 billion left a deficit of $43 billion (-67 + 36 - 12) in the U.S. balance of payments for 1992. This was settled by foreign monetary authorities, which increased their holdings of U.S. dollars by $43 billion. They were willing to accept these dollars because the dollar is accepted as an international currency and is used to settle accounts among practically all nations of the world.

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