Balance of Payments 227 FIGURE 8.3 Balance of Payments, Major Accounts I. Current Account Net changes in exports and imports of goods and services—tangibles and intangibles. A. Goods or merchandise account—tangibles; net balance known as the trade balance. B. Services account—intangibles. C. Unilateral transfers—transfers with no reciprocity (gifts, aid, migrant worker earnings), to satisfy the needs of double-entry recording, entry made that treats the aid or gift as purchase of goodwill. II. Capital Account Net changes in a nation’s international financial assets and liabilities; credit entry occurs when resident sells stock, bonds, or other financial assets to nonresident. Money flows to resident, while resident’s long-term international liabilities (debit entry) increase. A. Direct investment—located in one country and controlled by residents of another country. B. Portfolio investment—long-term investments without control. C. Short-term capital flows—such as currency exchange rate and interest rate hedging in the forward, futures, option, and swap markets; volatility and transaction privacy make this entry the least reliable measure. III. Official Reserves Account A. Gold imports and exports. B. Foreign exchange (foreign currencies) held by government. C. Liabilities to foreign central banks. Contrary to commonly held belief, a current account deficit is not always a sign of bad economic conditions; it simply shows the country is importing capital. This is no more unnatural or dangerous than importing wine or cheese. A current account deficit is a response to conditions in the country. Among these could be excessive inflation, low productivity, or inadequate saving. In the case of the United States, a current account deficit could occur because investments in the United States are secure and profitable, so that many foreigners want to own them (foreign direct investment, an import of capital) and export their earnings (repatriation). If there is a problem, it is in the underlying conditions and not in the deficit per se.25 Countries with relatively high price levels, high gross national products, high interest rates, and strong exchange rates, as well as relatively low barriers to imports and attractive investment opportunities, are more likely to have current account deficits than are other countries.26 In recent years the United States has had a substantial deficit in its current account. Citizens of the United States are importing more goods than they are exporting, yet they are exporting more services than they are importing. There also is a surplus in the U.S. capital account. Those dollars that leave the United States to pay for imported goods come back into the United States in the form of foreign-owned investments in the country (for example, Treasury bills and investment property in New York City). So let’s remember that a deficit or surplus in the current account cannot be explained or evaluated without simultaneously examining an equal surplus or deficit in the capital account. They need to be reviewed together. At this point, the international monetary system is a work in progress, one that is evolving to support an expanding and increasingly complex global trading system. It is flexible, offers a way to store value, and does not have inordinate storage or transportation costs. We also believe in it. We have confidence that it will be able to transfer value accurately and swiftly among us all.
Geringer_InternationalBusiness
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