Balance of payments

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The balance of payments (or BOP) is a measure of the payments that flow into and out from a particular country from and to other countries. It is determined by a country's exports and imports of goods, services, and financial capital, as well as financial transfers.

The balance of payments is a summary of all economic transactions between a country and all other countries for a specific time period, usually a year. The balance of payments account reflects all payments and liabilities to foreigners (debits) and all payments and obligations received from foreigners (credits).

Contents

1 Overview
2 History
3 United States Balance of Payments since 1960
4 See also
5 External links

5.1 Data

Overview

Blue = countries in current account surplus; Red = countries in current account deficit, 2005

The balance of payments for a country is the sum of the current account and the capital account.

[Note: What this article refers to as the "capital account" is more properly known as the financial account; it was renamed in the U.S. in the 1990s. For historical reasons, however, it is still often referred to as the capital account.]

Current account

The current account is the sum of net income from trade in goods and services, net factor income (such as interest payments from abroad), and net unilateral transfers from abroad. Positive net income from abroad corresponds to a current account surplus; negative net income from abroad corresponds to a current account deficit. Because exports generate positive net income, and because the trade balance is typically the largest component of the current account, a current account surplus is usually associated with positive net exports.

When analyzing the current account theoretically, it is often written as a function X of the real exchange rate, p, domestic GDP, Y, and foreign GDP, Y*. Thus the current account can be written as X(p, Y, Y*). According to theory, the current account X should increase if (1) the domestic currency depreciates (p increases), (2) domestic GDP decreases, or (3) foreign GDP increases. A domestic currency depreciation makes domestic goods relatively cheaper, boosting exports relative to imports. A decrease in domestic GDP reduces domestic demand for foreign goods, lowering imports without affecting exports. An increase in foreign GDP increases foreign demand for domestic goods, increasing exports without affecting imports.

Current account =

* Trade Balance

** Net Exports (Exports - Imports) of Merchandise (tangible goods)

** Net Exports (Exports - Imports) Services (such as legal and consulting services)

* + Net Factor Income From Abroad (such as interest and dividends)

* + Net Unilateral Transfers From Abroad (such as foreign aid, grants, gifts, etc.)

'' Capital account

The capital account is the net change in foreign ownership of domestic assets. If foreign ownership of domestic assets has increased more quickly than domestic ownership of foreign assets in a given year, then the domestic country has a capital account surplus. On the other hand, if domestic ownership of foreign assets has increased more quickly than foreign ownership of domestic assets, then the domestic country has a capital account deficit.

The accounting entries in the capital account record the purchase and sale of domestic and foreign assets. These assets are divided into categories such as Foreign Direct Investment (FDI), Portfolio Investment (which includes trade in stocks and bonds), and Other Investment (which includes transactions in currency and bank deposits).

Capital account =

* Increase in foreign ownership of domestic assets

* - Increase of domestic ownership of foreign assets

Official Reserve Account

The official reserve account records the government's current stock of reserves. Reserves include official gold reserves, foreign exchange reserves, and strategic defense reserves (SDRs), such as the Strategic Petroleum Reserve.

Balance of Payments Identity

The Balance of Payments is the sum of the Current Account and the Capital Account. The Balance of Payments Identity states that:

Balance of Payments = Current Account + Capital Account = Change in Official Reserve Account

Typically the change in official reserves in a given year is small relative to the Current Account and the Capital Account. Therefore it is sometimes approximated as zero. For example, if a government runs a current account deficit and has no change in official reserves, then the current account deficit must be balanced by a capital account surplus. The basic principle behind the identity is that a country can only consume more than it produces (a current account deficit) if it borrows from abroad (a capital account surplus). The United States has been carrying a negative current account balance for many years, and this debt has been primarily financed by issuing securities.

A country will have a negative balance of payments (a net decrease in official reserves) if the net of the current account and the capital account is a deficit. Similarly, there will be a positive balance of payments (a net increase in official reserves) if the net of the current and the capital account results in a surplus.

History

Historically these flows simply were not carefully measured, and the flow proceeded in many commodities and currencies without restriction, clearing being a matter of judgement by individual banks and the governments that licensed them to operate. Mercantilism was a theory that took special notice of the balance in payments and sought simply to monopolize gold, in part to keep it out of the hands of potential military opponents (a large "war chest" being a prerequisite to start a war, whereupon much trade would be embargoed).

As mercantilism gave way to classical economics, these crude systems were later regulated in the 19th century by the gold standard which linked central banks by a convention to redeem "hard currency" in gold. After World War II this system was replaced by the Bretton Woods institutions (the International Monetary Fund and Bank for International Settlements) which pegged currency of participating nations to the US dollar, which was redeemable nominally in gold. In the 1970s this redemption ceased, leaving the system without a formal base. Some consider the system today to be based on oil, a universally desirable commodity due to the dependence of so much infrastructural capital on oil supply. Since OPEC prices oil in US dollars, the US dollar remains a reserve currency, but is increasingly challenged by the euro, and to some degree the Japanese yen.

United States Balance of Payments since 1960

Balance of payments (millions of dollars)
During year 1960 1970 1980 1990 2000 2003
Current account
Exports of goods and services and income receipts (+) 30,556 68,387 344,440 706,975 1,421,429 1,302,876
Imports of goods and services and income payments (−) −23,670 −59,901 −333,774 −759,290 −1,779,188 −1,778,117
Unilateral current transfers, net −4,062 −6,156 −8,349 −26,654 −55,684 −67,439
Current account balance -415,150
Financial account

Capital account transactions, net ... ... ... −6,579 -1,010 −3,079

U.S.-owned assets abroad, net (increase/financial outflow (−)) −4,099 −8,470 −85,815 −81,234 -560,523 −283,414
Foreign-owned assets in the United States, net (increase/financial inflow (+)) 2,294 6,359 62,612 141,571 1,046,896 829,173
Statistical discrepancy -70,213

Financial account balance 415,150
Net 0 0 0 0 0 0

**Balance of payments (millions of dollars)**
During year	1960	1970	1980	1990	2000	2003
Current account
Exports of goods and services and income receipts (+)	30,556	68,387	344,440	706,975	1,421,429	1,302,876
Imports of goods and services and income payments (−)	−23,670	−59,901	−333,774	−759,290	−1,779,188	−1,778,117
Unilateral current transfers, net	−4,062	−6,156	−8,349	−26,654	−55,684	−67,439
Current account balance					-415,150
Financial account
Capital account transactions, net	...	...	...	−6,579	-1,010	−3,079
U.S.-owned assets abroad, net (increase/financial outflow (−))	−4,099	−8,470	−85,815	−81,234	-560,523	−283,414
Foreign-owned assets in the United States, net (increase/financial inflow (+))	2,294	6,359	62,612	141,571	1,046,896	829,173
Statistical discrepancy					-70,213
Financial account balance					415,150
Net	0	0	0	0	0	0

External links

Data

[IMF DSBB]
*[United States DSBB] (See "External Sector")
[BEA U.S. International Transactions Accounts Data]

You can also download historical balance of payments information from 1960 under the "All Tables" link of the following page:

[BEA Balance of Payments Section]