AP Econ Module 41 Capital Flows Balance Payments - Sunny Hills ...

A country's balance 0l paymenls on lhe
currenl accounl,0r lhe curlent account,
is its balance 0f payments 0n goods and
services plus net intemational transfer
payments and factor lncome.
A counlry's balance ol payments on
goods and seruices is the ditterence
between its exports and its impons during a
given period.
The merchandise trade balance, or
trade balance, is the difference between a
country's exports and imp0rts 0f goods,
The U.S. Balance of Payments in 2mB (billions of dollars)
2
3
Sales and purchases
ot goods and services
Factor income
Transf€rs
Cunent account
(1 +2+3)
olficial asset sales
and purchases
Private sales and
purchasss of assets
Financial account
(4+5)
Total
Source, Bureau of Eoonomic Analysis.
Payments from
loreigners
$1,827
765
487
47
Payments to
loreigners Net
$2,523
b4b
-534
-$696
119
-128
-705
_43
581
538
-167
send to their families in their country oforigin. Notice that Table 41.2 shows only the net
value of ffansfers. ThaCs because the U.S. government provides only an estimate ofthe
neg not a breakdown between payments to foreigners and pal,rnents from foreigners.
The next two rows ofTable 41.2 show payments resulting fiom sales and purchases
ofassets, broken down by who is doing the buying and selling. Row 4 shows rransactions
that involve governments or government agencies, mainly central banks. As we,ll
leam later, in 2008, most ofthe U.S. sales in this caregory involved the accumulation of
foreign exchange ruenu by the central banks ofChina and oil-expocing counries. Row 5
shows private sales and purchases of assets. For example, the 2008 purchase of Budweiser,
an American brewing company, by rhe Belgian corporation InBev showed up in
the second column ofrow 5; purchases ofEuropean stocks by U.S. invesrors show up as
positive values in the third column. However, because U.S. residents sold more foreign
assets than they purchased in 2008, rhe value for this category is negarive.
In laying out Table 41,2, wehave separared rows 1, 2, and 3 into one group and rows
4 and 5 into another. This reflects a fundamenral difference in how these two groups of
transactions affect the future.
Vtren a U.S. residenr sells a good, such as wheat, to a foreigner, thaCs the end ofthe
transaction. But a financial assetr such as a bon4 is different. Remember, a bond is a
promise to pay interesr and principal in the future. So when a U.S. resident sells a bond
to a foreigner, that sale creates a liability: the U.S. resident will have to pay interest and
repay principal in the future. The balance of payments accounts distinguish berween
transactions that don't create liabilities and those that do.
Transactions that don't create liabilities are considered part ofthe balance ofpayments
on the cutrerlt account, often referred to simply as the cufrerlt accoune the
balance of payments on goods and services plus factor income and net international
transfer payments. The balance of row 1 ofTable 41.2, -9696 billion, coresponds to
the most important part ofthe currenr account: the balance ofpapnents on goods
and services, the difference between the value ofexports and che value ofimporrs during
a given period.
By the way, ifyou read news reports on rhe economy, you may well see references to
another measureJ the merchandise tmde balance, sometimes referred to as the trade
balance for short. This is rhe difference between a councy's exports and imports of
412 section 8 The Open Economy: lnternational Trade and Finance