UNIVERSIDAD CATÓLICA BOLIVIANA

‘SAN PABLO’

Escuela de la Producción y la Competitividad

INTERNATIONAL FINANCE

Session 3

Sem II / 2025
Overview 3
Chapter Three
• Balance of Payments Accounting
• Balance of Payments Accounts
• The Current Account.
• The Capital Account.
• The Financial Account.
• Statistical Discrepancy.
• Official Reserves Account.
• The Balance of Payments Identity
• Balance of Payments Trends in Major Countries
Balance of Payments Accounting 1

• Balance of payments is the statistical record of a

country’s international transactions over a certain
period of time presented in the form of double-entry
bookkeeping
• Important to study for a few reasons:
1. Provides detailed information concerning the demand and
supply of a country’s currency.
2. May signal its potential as a business partner for the rest of
the world.
3. Used to evaluate the performance of the country in
international economic competition.
Balance of Payments Accounting 2

• Any transaction that results in a receipt from

foreigners will be recorded as a credit, with a positive
sign, in the U.S. balance of payments
• For example, foreign sales of U.S. goods and services,
goodwill, financial claims, and real assets.
• Any transaction that gives rise to a payment to
foreigners will be recorded as a debit, with a negative
sign, on the U.S. balance of payments
• For example, U.S. purchases of foreign goods and services,
goodwill, financial claims, and real assets.
Balance of Payments Accounts
• International transactions can be grouped into the
following four main types:
1. Current account includes the export and import of goods and
services.
2. Capital account consists of capital transfers and the cross-
border acquisition and disposal of nonproduced nonfinancial
assets. (tend to be large & infrequent)
3. Financial account (excluding official reserves) includes all
purchases and sales of financial assets, such as stocks, bonds,
bank accounts, etc.
4. Official reserve account covers all purchases and sales of
international reserve assets.
Summary of the U.S. Balance of
Payments for 2018 ($b) 1

Credits Debits
Current Account
[1] Exports 2,500.7
[1.1] Goods 1,672.3
[1.2] Services 828.4
[2] Imports −3,122.9
[2.1] Goods −2,563.7
[2.2] Services −559.2
[3] Primary income 1,060.4 −816.1
[4] Secondary income 140.6 −251.2
Balance on current account −488.5
[[1] + [2] + [3] + [4]]
Capital Account 9.4 0
Balance on capital account 9.4
Summary of the U.S. Balance of
Payments for 2018 ($b) 2

Credits Debits
Financial Account
[5] Direct investment 267.1 50.6
[6] Portfolio investment 340.3 −210.4
[6.1] Equity securities 147.2 −97.2
[6.2] Debt securities 172.8 −113.2
[6.3] Derivatives, net 20.3
[7] Other investment 213.8 −136.9
Balance on financial account 524.5
[[5] + [6] + [7]]
[8] Statistical discrepancies −40.5
Overall balance 4.9
Official Reserve Account −4.9
• Source: The U.S. Bureau of Economic Analysis.
The Current Account 1

• Divided into four finer categories:

1. Goods trade represents exports and imports of tangible
goods (for example, oil, wheat, clothes, automobiles,
computers, etc.)
2. Services include payments and receipts for legal,
consulting, financial, and engineering services; royalties
for patents and intellectual properties; shipping fees;
and tourist expenditures.
3. Primary income consists largely of payments and
receipts of interest, dividends, and other income on
foreign investments that were previously made.
4. Secondary income involves “unrequited” payments.
The Current Account 2

• Current account balance, especially the trade balance,

tends to be sensitive to exchange rate changes
• Currency depreciation or devaluation can improve (worsen)
the trade balance if imports and exports are responsive
(inelastic).
• J-curve effect refers to the initial deterioration and
eventual improvement of trade balance following the
depreciation of a country’s currency
The Financial Account
• Measures the difference between U.S. sales of assets
to foreigners and U.S. purchases of foreign assets
• Can be divided into three categories:
1. Foreign direct investment (FDI) occurs when the investor
acquires a measure of control of the foreign business.
2. Portfolio investment mostly represents sales and purchases of
foreign financial assets, such as stocks and bonds, that do not
involve a transfer of control.
3. Other investment includes transactions in currency, bank
deposits, trade credits, etc.
Statistical Discrepancy
• Exhibit 3.1 shows a statistical discrepancy of −$40.5
billion in 2018
• Recordings of payments/receipts arising from international
transactions are done at different times and places, possibly
using different methods.
• Financial transactions may be mainly responsible for
discrepancy.
• Overall balance (or official settlement balance ) is the
cumulative balance of payments including the current
account, capital account, financial account, and the
statistical discrepancies
The Official Reserves Account
• Official reserve account includes transactions
undertaken by the authorities to finance the overall
balance and intervene in foreign exchange markets
• Post-1945, international reserve assets comprise:
1. Gold.
2. Foreign exchanges.
3. Special drawing rights (SDRs).
4. Reserve positions in the IMF.
The Balance of Payments Identity (BOPI)

BCA + BKA + BFA + BRA = 0

• where
BCA = balance on current account
BKA = balance on capital account
BFA = balance on financial account
BRA = balance on the reserves account

• Under fixed exchange regime, countries maintain

official reserves that allow them to have BOP
disequilibrium
The Balance of Payments Identity (BOPI)
BOP Trends in Major Countries 1

• U.S. has experienced continuous deficits on the current

accounts since 1982 and continuous surpluses on the
financial account; with the sole exception of 1991
• Magnitude of U.S. current account deficits is far greater than
any that other countries ever experienced during the 36-
year sample period.
• Japan has had an unbroken string of current account
surpluses (and financial account deficits) since 1982
even though the value of the yen rose steadily until the
mid-1990s
BOP Trends in Major Countries 2

• U.K. recently experienced continuous current account

deficits, coupled with financial account surpluses
• Magnitude is far less than that of the U.S.
• Germany traditionally had current account surpluses,
but between 1991 to 2001 experienced current
account deficits
• Attributed to German reunification and the resultant need to
absorb more output domestically to rebuild the East German
region.
• Since 2002, Germany has returned to its earlier pattern.
BOP Trends in Major Countries 3

• China tends to have a surplus on the current account,

as well as the financial account (until recently)
• “Global imbalance”
• Overall, U.S. and U.K. generally use up more outputs than
they produce, whereas the opposite holds for China, Japan,
and Germany.
Top U.S. Trading Partners, 2018 ($b)
Rank Country Imports Exports Trade Balance Total Trade
1 China 539.5 120.3 −419.2 659.8
2 Canada 318.5 298.7 −19.8 617.2
3 Mexico 346.5 265.0 −81.5 611.5
4 Japan 142.6 75.0 −67.6 217.6
5 Germany 125.9 57.7 −68.2 183.6
6 Korea, Republic 74.3 56.3 −18.0 130.6
7 United Kingdom 60.8 66.2 5.4 127.0
8 France 52.5 36.3 −16.2 88.8
9 India 54.4 33.1 −21.3 87.5
10 Italy 54.7 23.2 −31.5 77.9
11 Taiwan 45.8 30.2 −15.6 76.0
12 Netherlands 24.6 49.4 24.8 74.0
13 Brazil 31.2 39.5 8.3 70.7
14 Ireland 57.5 10.7 −46.8 68.2
15 Switzerland 41.1 22.2 −18.9 63.4
• Source: Census Bureau.
 UNIVERSIDAD CATÓLICA BOLIVIANA
‘SAN PABLO’

Escuela de la Producción y la Competitividad

INTERNATIONAL FINANCE

Session 3

Sem II / 2025