U.S. Balance of Payments: Structure, Data & Analysis

Overview of the U.S. Balance of Payments

The United States balance of payments is a comprehensive statement of all economic transactions between the U.S. and all other countries over the course of a year (Black, 2002). A balance of payments table 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 (Black, 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). The capital account measures foreign investment in the U.S. and U.S. investment overseas. The balancing account allows for changes in official reserve assets (SDRs, gold, etc.).

The first section of the balance of payments consists 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 — leads 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. Conversely, an increase in U.S. payments — such as an increase in U.S. imports — causes an increase in the supply of dollars, thereby weakening the dollar in relation to foreign currencies.

Item Analysis: Components and Line Descriptions

The balance of payments is influenced by many factors, including the financial and economic climate of other countries. If 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 overseas.

The current account includes exports and imports — or visible trade — as well as receipts from and spending abroad on services, such as tourism (Black, 2002). The current account also includes receipts of property income from abroad and remittances of property income abroad, as well as receipts and payments of international transfers and gifts. The capital account includes inward and outward foreign direct investment, 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 (U.S. Department of Commerce, 2002). This value equals 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 — that is, 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, and pension plans. Line 14 indicates U.S. government income receipts.

Line 15 records imports of goods, services, and income. This value equals 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, and insurance.

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, and pension plans. 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. It 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, excluding the Federal Reserve.

Line 43 indicates private purchases of foreign assets by U.S. residents. This 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 where 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 as reported by U.S. banks.

Line 48 indicates the sum total of foreign assets in the U.S. It is composed 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 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 representing a greater than 10% ownership share. Line 58 indicates total purchases of U.S. Treasury bills by foreigners, corresponding to foreign loans to the U.S. government. Line 59 represents U.S. currency transported abroad and held by foreigners. Line 60 indicates non-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 items with the sign reversed and 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 statement is zero.

Current Account Data: 2000 vs. 2001

In 2000, the U.S. showed a deficit in merchandise trade — the trade deficit — and, in the absence of strong net investment income inflows, a current account deficit. These deficits were offset by current account surpluses and the purchase of U.S. assets by foreign individuals and institutions, meaning that the net flow of receipts and payments was in balance without the need for official transfers.

All figures below are in millions of dollars and compare data from 2000 to 2001.

Line 1 (exports of goods, services, and income receipts) fell from $1,418,568 in 2000 to $1,298,397 in 2001 (U.S. Department of Commerce, 2000, 2002). Line 2 (exports of goods and services) dropped from $1,065,702 to $1,004,589. Line 3 (goods, balance of payments basis) dropped from $772,210 to $720,831. Line 4 (services) decreased from $293,492 to $283,758. Line 5 (transfers under U.S. military agency sales contracts) fell from $14,060 to $12,813. Line 6 (travel) fell from $82,042 to $72,295.

Line 7 (passenger fares) fell from $20,745 to $17,734. Line 8 (all other transportation) fell from $30,185 to $28,292. Line 9 (royalties and license fees) increased from $38,030 to $38,875. Line 10 (other private services) increased from $107,568 to $112,892. Line 11 (U.S. Government miscellaneous services) fell from $862 to $857. Line 12 (income receipts) dropped from $352,866 to $293,808. Line 13 (income receipts on U.S.-owned assets abroad) fell from $350,525 to $291,342.

Line 14 (direct investment) dropped from $149,240 to $132,651. Line 15 (other private receipts) fell from $197,440 in 2000 to $155,175 in 2001. Line 16 (U.S. government receipts) fell from $3,845 to $3,516. Line 17 (compensation of employees) showed a decrease from $2,341 to $2,466.

The following table presents Lines 18–38 of the current account:

Line 18 (imports of goods, services, and income): -$1,809,099 (2000) / -$1,665,325 (2001)
Line 19 (imports of goods and services): -$1,441,441 / -$1,352,399
Line 20 (goods, balance of payments): -$1,224,217 / -$1,147,446
Line 21 (services): -$217,024 / -$204,953
Line 22 (direct defense expenditures): -$13,560 / -$14,775
Line 23 (travel): -$64,537 / -$58,921
Line 24 (passenger fares): -$23,197 / -$24,197
Line 25 (other transportation): -$41,058 / -$38,230
Line 26 (royalties and license fees): -$16,106 / -$16,399
Line 27 (other private services): -$54,687 / -$50,289
Line 28 (U.S. government miscellaneous): -$2,879 / -$2,932
Line 29 (income payments): -$367,658 / -$312,926
Line 30 (income payments on foreign-owned assets in the U.S.): -$360,146 / -$305,096
Line 31 (direct investment): -$68,009 / -$37,430
Line 32 (other private payments): -$184,465 / -$163,353
Line 33 (U.S. government payments): -$107,672 / -$104,313
Line 34 (compensation of employees): -$7,512 / -$7,830
Line 35 (unilateral current transfers): -$54,136 / -$50,501
Line 36 (U.S. government grants): -$16,821 / -$11,334
Line 37 (U.S. government pensions and other transfers): -$4,705 / -$5,804
Line 38 (private remittances): -$32,610 / -$33,363

When exports surpass imports, the money supply increases and there is a surplus in the balance of payments; the economy "earns" money because the banking sector's reserves are increased. Compared to 2000, the trade deficit in 2001 was up by 25 percent, the result of a larger increase in imports relative to exports.