Chapter 11
The Balance of Payments
This chapter introduces the balance of payments. Alternative summary measures are presented and
discussed in terms of what they may offer for policy evaluation. Students often have a difficult time
learning how to classify transactions. Those who have not had an accounting course will require a patient
explanation of double-entry bookkeeping. A thorough drill on classifying transactions in a hypothetical
balance of payments is a necessity to ensure that the material is understood.
The text presents balance of payments data as found in the Survey of Current Business and Federal
Reserve Bank of St. Louis International Economic Conditions.
◼ Chapter Outline
Introduction
Introduction to Balance of Payments Accounting
Current Account Entries
Financial Accounts Entries
Measures of the Balance of Payments
Current Account Balance
Global Insights 12.1: Is the U.S. Current Account Deficit Sustainable?
Official Settlements Balance
◼ Suggested Answers for the End-of–Chapter Exercises
1. Identify whether each of the following is a debit or a credit in the country of Freedonia’s BOP
and indicate where the item would be classified.
a)
Freedonian firms export $250 million worth of goods.
b)
Freedonian citizen’s purchase $50 million worth of tickets on US Airways flights.
c)
A Freedonian firm purchases a shoe factory in Mexico for $30 million.
d)
Freedonia receives $5 million in foreign aid from the United States.
e)
Freedonian citizens deposit $15 million in Citibank account in New York.
f)
Freedonia imports $220 million worth of goods.
g)
Freedonian firms borrow $45 million by issuing bonds in the United States.
h)
U.S. firms earn (and repatriate) $5 million in profits from operations in Freedonia.
i)
The Freedonia central bank buys $10 million in U.S. Treasury bills.
a. credit; merchandise exports
b. debit; services (transportation)
2. In the previous example, suppose that these are all of the entries in Freedonia’s BOP table.
Calculate the value of errors and omissions.
3. Consider each of the following events. For each, identify whether it should be included in the U.S.
BOP table; where relevant, determine whether it is a debit or credit entry; and calculate the
statistical discrepancy entry for the U.S. BOP table.
a. Ford imports $200 million worth of engines made in its motor plant in Toronto.
b. Boeing sells 10 767′s worth $500 million to Swiss Air.
c. Americans earn $15 million in interest payments on UK government bonds.
d. Microsoft pays $5 million in dividends to stockholders in Japan.
e. The U.S. government distributes $50 million in foreign aid.
f. GM buys Toyota for $1 billion.
g. British Petroleum buys Exxon for $750 million.
h. While on vacation in France, a Pittsburgh resident has her paycheck direct
deposited to her PNC bank account.
i. The State of Pennsylvania sells $100 million in state government bonds to Lloyds
of London.
j. The U.S. government sells $50 million in U.S. Treasury bills to the government of Japan.
k. The U.S. government acquires $10 million in gold from the government of Saudi Arabia.
a. included; debit entry
Chapter 11 The Balance of Payments 51
4. Using the data in problem 1, calculate Freedonia’s CAB and its official settlements balance.
5. Using the data in problem 3, calculate the U.S. CAB and its official settlements balance.
6. Suppose that foreigners decided that financial investments in the United States were not a good
idea. What would they do? What effect would these actions have on the value of the dollar and
U.S. interest rates?
Foreigners would either reduce their purchases of U.S. assets or sell their holdings of U.S. debt
7. Japan has run large current account surpluses for much of the past two decades, yet no one ever
asks if these surpluses are sustainable. Why are surpluses treated differently than deficits?
Japan is a mature industrialized country. Its CAB surplus is due to the fact that its national income
8. Use the information in the following table on Switzerland’s international transactions to answer the
following questions (amounts are millions of U.S. dollars):
Balance of Payments Account
Amount
Merchandise imports
$92,871
Services imports
$15,406
Services exports
$26,683
Investment income receipts
$43,720
52 Husted/Melvin • International Economics, Ninth Edition
Unilateral transfers
−$ 3,736
a. What is the balance of trade?
b. What is the current account?
c. Did Switzerland become a larger international net creditor during this year?