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Balance-of-Payments Accounts and Net Financial Flows. Financial Inflow. Balance of Payments is a flow account, which consists of the current account and the capital and financial account

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financial inflow
Financial Inflow
  • Balance of Payments is a flow account, which consists of the current account and the capital and financial account
  • A flow of capital, real and/or financial, into a country, takes the form of increased purchases of domestic assets by foreigners and/or reduced holdings of foreign assets by domestic residents. Inflows are recorded as positive, or a credit, in the capital and financial account.
  • Each country also has an international balance sheet, which is a stock account which shows assets and liabilities abroad and foreign assets and liabilities at home -- Called the international investment positions accounts in the U.S. (the accumulated stocks of U.S.-owned assets abroad and of foreign-owned assets in the United States) .
  • The net change in the international investment positions accounts from the beginning of one year to the end of the next is the net capital/financial flow for the year

Fred Thompson

exchange and net flows
Exchange and Net Flows
  • Exchange of Real Assets – exchange of goods and services for other goods and services or for financial claims (will give rise to a net change in financial claims if x≠m)
  • Exchange of Financial Assets – Exchange of financial claims for other financial claims (net financial claims are unchanged)
  • Hence, m-x = net capital flow, also = I-S

[ignoring reporting errors and official settlements]

Fred Thompson

balance of payments statistics for the united states 1966 amounts in millions of dollars
Sources of Foreign Exchange

Exports of Goods and Services $43,142

Balance on goods, services, remittances, and pensions +$4065

Foreign Capital Flow, net $2,532

Balance of all of the above -$1357

Change in U.S. Reserve Assets $568

Change in Liquid Liabilities of Foreign Accounts $789

.

Uses of Foreign Exchange

Imports of Goods and Services $38,063

Remittances and Pensions $1,015

U.S. Government grants, net $3,444

U.S. private Capital Flow, net $4,298

Errors and Omissions $210

Source: Federal Reserve Bulletin, April 1969, pp A70-71

Balance of Payments Statistics for theUnited States, 1966(Amounts in millions of dollars)

Fred Thompson

international transactions accounts balance of payments
International Transactions Accounts (Balance of Payments)

A quarterly statistical summary of transactions between U.S. and foreign residents organized into three major categories:

  • The current account
  • The capital account
  • The financial account

Fred Thompson

balance of payments
Balance of Payments
  • System of accounts which is a subset of the National Income and Production Accounts
    • A double-entry bookkeeping system.
    • Debit Entries: Transactions that generate a payment outflow (e.g., import).
    • Credit Entries: Transactions that generate a payment inflow (e.g., export).

Fred Thompson

balance of payments8
Balance of Payments
  • The current account includes exports and imports of goods, services, income, and current transfers.
    • Goods
    • Services
    • Income Receipts and Payments
    • Unilateral Transfers

Fred Thompson

balance of payments9
Balance of Payments
  • Goods: Exports and imports of tangible items.
  • Services: Exports and imports of services, for example:
    • Typical business services such as banking and financial services, insurance, and consulting.
    • Tourism

Fred Thompson

balance of payments10
Balance of Payments
  • Income Receipts: Includes items such as
    • Investment income on US-owned assets abroad.
    • Receipts of income on US direct investment abroad.
    • Government income receipts

Fred Thompson

balance of payments11
Balance of Payments
  • Income Payments: Includes items such as
    • Investment income on foreign-owned assets in the United States.
    • Payments of income on foreign direct investment in the United States
    • US Government income payments

Fred Thompson

balance of payments12
Balance of Payments
  • Unilateral Transfers: Includes items such as:
    • Government grants abroad
    • Private remittances
    • Private grants abroad

Fred Thompson

balance of payments the financial sector
Balance of PaymentsThe Financial Sector
  • In June 1999, US capital account definitions were modified to bring them more in line with definitions recommended by the International Monetary Fund.
  • Now there are two accounts:
    • The capital account includes capital transfers, such as debt forgiveness.
    • The financial account includes transactions for official assets, for U.S. Government assets other than official reserve assets, for direct investment, for portfolio investment, and for other investment.

Fred Thompson

balance of payments the financial sector15
Balance of PaymentsThe Financial Sector
  • The new Capital Account includes items that were previously included in unilateral transfers, such as:
    • Debt forgiveness
    • Migrants’ transfers (as they leave the country).
  • The new capital account is small for the US (< 0.1 percent of capital flows), but expected to grow.

Fred Thompson

balance of payments the financial sector16
Balance of PaymentsThe Financial Sector
  • The Financial Account
    • Records international transactions in the financial sector
    • Includes portfolio and foreign direct investment
    • Includes changes in banks’ and brokers’ cash deposits that arise from international transactions.

Fred Thompson

balance of payments the financial sector17
Balance of PaymentsThe Financial Sector
  • US-Owned Assets Abroad: Increase or decrease in US ownership of foreign financial assets.
  • Foreign-Owned Assets in the US: Increase or decrease in foreign ownership of domestic assets.
  • Reserve Assets: Primarily the assets of central banks.

Fred Thompson

balance of payments the financial sector18
Balance of PaymentsThe Financial Sector
  • Portfolio Investment: Individual or business purchase of stocks, bond, or other financial assets or deposits. (An income strategy)
  • Foreign Direct Investment: Purchase of financial assets that results in a 10 percent or greater ownership share. (A financial control strategy)

Fred Thompson

feldstein horioka
Feldstein - Horioka
  • Savings and Investment Relation
  • Based on a closed economy income condition:

y = c + i + g.

  • Rearrange as:

y - c - g = i.

Fred Thompson

feldstein horioka23
Feldstein - Horioka
  • Rearranged as:

y - c - g = i.

  • Note that y - c - g equals savings, s. Then:

s = i.

  • In a closed economy, domestic investment is equal to domestic saving by definition, but is also correlated in practice, i.e., correlation coefficient is necessarily close to 1 in value.

Fred Thompson

international flow of goods services capital
International Flow of Goods, Services, & Capital
  • Domestic Savings and Investment & NFF

National Income (GNY) = Consumption (C) + Savings (S)

National Spending (GNE) = Consumption (C) + Investment (I)

GNY - GNE = S - I

GNY - GNE = Exports (x) - Imports (m)

S - I = x - m

Net Foreign Investment = x - m

Fred Thompson

government budget deficits and nff
Government Budget Deficits and NFF

GNE = Household spending + Private I + Government spending

= GNY - Private S - Taxes + Private I + Government spending

GNE - GNY = Private (I - S) + GovDeficit/Surplus

NFF = Private savings surplus - GovDeficit

Fred Thompson

slide28
Basic Premise

A current account deficit must be financed by capital inflows, or it cannot be incurred in the first place

slide29

FACT

Over 1982-2003, U.S. current account deficits have averaged $183 billion per year.

$4 trillion worth of assets have been transferred to foreign ownership.

scale variables i
Scale Variables I

U.S. monthly GDP: $1 trillion

  • Monthly goods and services exports: $130 billion = 13%
  • Monthly goods and services imports: $185 billion = 18.5%
  • Balancing item: net capital flow: $55 billion = 5.5%

Fred Thompson

scale variables ii
Scale Variables II

U.S. GDP per worker: $84,000 per year

  • Exports of $10,900 per year
  • Imports of $15,500 per year

Fred Thompson

slide33

Result:

  • Foreign claims on U.S. assets now exceed U.S. claims on foreign assets by about $2.7 trillion.
    • Storing up purchasing power for the future
    • Private political risk insurance
    • Public political risk insurance
international investments market value end 2003
International Investments(market value, end-2003)
  • U.S. foreign investments: $7.9 trn
  • Foreign investments in U.S.: $10.5 trn
  • Net: -$2.7 trn

Much of this capital inflow has been portfolio investment.

Some has been direct investment.

foreign direct investment market value end 2003
Foreign Direct Investment(market value, end-2003)
  • U.S. DI abroad: $2.7 trillion
  • Foreign DI in U.S.: $2.4 trillion
  • Net: $0.3 trillion
slide36

Direct Investment Positions

At current market value, $ trillion

U.S. Direct Investment Abroad

Foreign Direct Investment in U.S.

Fred Thompson