The Balance of Payments: Linking theUnited States to the International EconomyThe Current Account

Trade Flows for the United States and Japan, 2006

The Balance of Payments of the United States, 2006 (billions of dollars)

CURRENT ACCOUNTExports of goods $1,023

Imports of goods −1,861

Balance of trade −838

Exports of services 423

Imports of services −343

Balance of services 80

Income received on investments 650

Income payments on investments −614

Net income on investments 36

Net transfers −90

Balance on current account −812

Don’t forget net compensation of nationals workingabroad(= Labor Services)

FINANCIAL ACCOUNTIncrease in foreign holdings of assets in the United States 1,860Increase in U.S. holdings of assets in foreign countries −1,055Balance on Financial Account 805

BALANCE ON CAPITAL ACCOUNT -4Statistical discrepancy 11Balance of payments 0

The Balance of Paymentsbalances:Current Account +Financial Account +Capital Account

+Statistical Discrepancy = ZERO

U.S. Imports and Exports, 1970–2006

Financial account The part of the balance of payments that records purchases of assets a country has made abroad and foreign purchases of assets in the country.

Net foreign investment The difference between capital outflows from a country and capital inflows.

Also equal to net foreign direct investment (fdi) plus net foreign portfolio investment.

Capital account The part of the balance of payments that records relatively minor transactions, such as migrants’ transfers, and sales and purchases of nonproduced, nonfinancial assets.

Current account Records payments for currently produced goods and services, including capital and labor services.

•Mostly exports and imports of goods and services.• Also includes net int’l earnings of country’s labor and capital resources.•Unilateral transfers (exports and imports not paid for) are netted out.

Current Account Balance + Financial Account Balance = 0Current Account Balance = -Financial Account Balanceor:

Net Exports = Net Foreign Investment … NX = NFIPrivate Saving = National Income – Consumption - Taxes

Sprivate = Y – C – T = (C + I + G + NX) - C - T = I + (G - T) + NFIPrivate saving finances domestic and foreign investment and the government’s deficit

Public Saving = Taxes – Gov’t Spending = Spublic = T – G National Saving = Private Saving + Public Saving

S = Sprivate + SpublicS = [I + (G - T) + NX] + (T - G) = I + NFI

A country that saves a lot has positive NX and invests abroad-NFI = I - S = I - Sprivate - (T - G) = (I - Sprivate) + (G - T) = - NX

Twin Deficit: G-T up NX down

Balance of Payment Arithmetic

Why Is the United States the “World’s Largest Debtor”?

Large current account deficits have resulted in foreign investors purchasing large amounts of U.S. assets.

Can the U.S. Current Account Deficit Be Sustained? Rebalancing!

Sustaining the Unsustainable

U.S. trade-weighted exchange index: Major currencies.