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U.S. Balance of Payments
The United States balance of payments is an overall statement of all economic transactions between the U.S. And all other countries over a year's times (Oxford, 2002). A table of the balance of payments shows the amount of money received from other parts of the world and the amount spent abroad. These transactions are measured in terms of receipts and payments.
In the U.S., a receipt represents money coming into the country or any transaction that requires the exchange of foreign currency into dollars (Oxford, 2002). A payment represents dollars going out of the country or any transaction that requires the conversion of dollars into another currency. The three main components of the Balance of Payments are as follows:
the current account: includes merchandise (exports and imports) and investment income (rents, profits, interest).
A the capital account: measures foreign investment in the U.S. And U.S. investment oversees.
A the balancing account: allows for changes in official reserve assets (SDR's, Gold, etc.).
Basically, the first section of the balance of payments is made up of a current balance, which summarizes imports and exports; net income on investments, such as payments of profits and interest on debt; and transfers between individuals.
The second section represents a capital balance of payments that records investments and loans, including those made by multinationals and banks.
U.S. Exports include all goods or services produced in the U.S. And sold to other countries in the international market. U.S. Imports are goods or services produced in other countries and sold in the United States An increase in U.S. receipts (such as an increase in U.S. exports) will lead to increased demand for dollars and an increased supply of foreign currency on foreign exchange markets.
This increased demand creates a stronger dollar relative to other currencies. An increase in U.S. payments (such as increase in U.S. imports) causes an increase in the supply of dollars, therefore weakening the dollar in relation to foreign currencies.
The balance of payments is influenced by many factors, including the financial and economic climate of other countries. If the U.S. banks are offering higher interest rates for deposits than banks abroad, foreign funds will flow into the United States. Conversely, if interest rates are higher abroad, U.S. investors will choose to invest their money abroad.
The current account includes exports and imports, or visible trade, as well as receipts from and spending abroad on services, such as tourism (Oxford, 2002). The current account also includes receipts of property incomes from abroad and remittances of property incomes abroad, as well as receipts and payments of international transfers of gifts.
The capital account of the balance of payments includes inward and outward foreign direct investments, as well as sales and purchases of foreign securities by residents and of domestic securities by non-residents.
The third element of the balance of payments is changes in official foreign exchange reserves.
Line 1 indicates the value of all U.S. exports of goods, services and income (Department of Commerce, 2002). This value is equal to the sum of lines 2, 3 and 11. Line 2 indicates exports of merchandise goods. Line 3 indicates exports of services to foreigners. Line 11 indicates income receipts on U.S. assets abroad, meaning profits and interest earned by U.S. residents on investments in other countries.
Line 12 indicates direct investment receipts, or profit earned by U.S. companies on foreign direct investment. Line 13 indicates other private receipts, such as interest and profit earned by individuals, businesses, investment companies, mutual funds, pension plans, etc. Line 14 indicates U.S. government income receipts.
Line 15 records imports of goods services and income. This value is equal to the sum of lines 16, 17 and 25. Line 16 indicates imports of merchandise goods. Line 17 indicates imports of services such as travel services, passenger fares, insurance and more.
Line 25 indicates income payments on foreign assets in the U.S. Line 26 records direct investment by foreigners in the U.S. Line 27 reports other private payments, including interest and profit earned by individuals, businesses, investment companies, mutual funds, pension plans, etc.
Line 28 records payments made by the U.S. government to foreigners. Line 29 records net unilateral transfers, such as government grants to foreign nations, government pension payments, and private remittances to family and friends abroad.
Line 33 indicates the value of purchases of foreign assets by U.S. residents, or capital outflow. The line is the sum of U.S. official reserve assets (line 34), U.S. government assets (line 39), and U.S. private assets (line 43).
Line 34 represents net U.S. federal reserve transactions. Line 39 represents net purchases of assets by the U.S. government, though not by the Federal Reserve.
Line 43 indicates private purchases of foreign assets by U.S. residents. This item is the primary component of total U.S. assets abroad and consists of direct investment (line 44), Foreign securities (line 45), U.S. claims reported by U.S. non-banks (line 46), and U.S. claims reported by U.S. banks (line 47).
Line 44 indicates direct investment by U.S. residents abroad. Line 45 indicates purchases of foreign stocks and bonds by U.S. individuals and businesses when there is no controlling interest in the foreign company. Line 46 indicates resident purchases of foreign assets reported by non-banks.
Line 47 reports U.S. resident purchases of foreign assets reported by U.S. banks.
Line 48 indicates the sum total of foreign assets in the U.S. This item is composed of the sum of foreign official assets in the U.S. (line 49), and other foreign assets in the U.S. (line 56). Line 49 refers to purchases of U.S. assets by foreign governments or foreign central banks.
Line 56 refers to all other foreign assets purchases of U.S. assets and is the main item of capital inflows. It is composed of direct investment (line 57), U.S. treasury securities (line 58), U.S. currency (line 59), U.S. securities other than T-bills (line 60), U.S. liabilities reported by U.S. non-banks (line 61), and U.S. liabilities reported by U.S. banks (line 62).
Line 57 refers to purchases of U.S. factories and stocks when there is a greater than 10% ownership share. Line 58 indicates total purchases of U.S. treasury bills by foreigners. This corresponds to foreign loans to the U.S. government.
Line 59 represents U.S. currency that has been transported abroad and is held by foreigners. Line 60 indicates non- U.S. treasury bill and non-direct investment purchases of stocks and bonds by foreigners.
Line 61 indicates deposits and purchases of U.S. assets by foreigners reported by U.S. non-banks. Line 62 reports deposits and purchases of U.S. assets by foreigners reported by U.S. banks.
Line 64 represents the statistical discrepancy. It is the sum of all of the items with the sign reversed. It is included to satisfy the accounting requirement that all debit entries be balanced by credit entries of equal value. When the statistical discrepancy is included, the balance on the complete balance of payments is zero.
What the Balance of Payments Says About the Economy
The difference between total receipts and expenditure in any category of payments is what the balance of payments reveals. Overall payments, including changes in foreign exchange reserves, must balance. However, this rule does not apply to any one category of payments.
The balance of payments on current accounts is the difference between total receipts and expenditures on current accounts. If receipts exceed spending, there is a current account deficit.
The balance of payments of capital accounts is the difference between receipts and expenditures on capital transactions with other countries. Receipts come from the sale of securities or real capital assets to non-residents. Expenditures are loans to non-residents or purchases of real assets abroad. Changes in foreign currency reserves are equal to the sum of the current and capital account surpluses.
Balance of Payments in 2000 and 2001
In 2000, the U.S. showed a deficit in merchandise trade or the trade deficit and, in the absence of strong net investment income inflows, a current account deficit. These deficits were offset by the current account surpluses, the purchase of U.S. assets by foreign individuals and institutions, meaning that net flow of receipts and payments was in balance without the need to any type of official transfers.
Balance of Payments Data -- 2000 and 2001($millions)
All numbers below are shown in millions and compare data from 2000 to 2001.
Comparison of U.S. Balance of Payments Current Account Data Lines 1-17
Line 1, exports of goods and services and income receipts showed that the numbers feel from 1,418,568 in 2000 to 1,298,397 in 2001 (Department of Commerce, 2000, 2002). Line 2 revealed that exports of goods and services dropped from 1,065,702 to 1,004,589. Line 3 showed that goods, balance of payments basis dropped from 772,210 to 720,831. Line 4 showed that services decreased from 293,492 to 283,758. Line 5 showed that transfers under U.S. military agency sales contracts fell from 14,060 to 12,813. Line 6 showed that travel fell from…[continue]
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