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OVERVIEW In theory, the balance of payments of any country is zero (because every unit of currency must come from somewhere). It is this assumption that the Mundell-Fleming Model (based on the traditional IS/LM ) is built on. In practice the balance of payments rarely equal zero for any point in time. Imperfect Capital Mobility and transactions crossing between two Fiscal Year s distort the balance for Short-run analysis. If there is more Money flowing into a country than there is flowing out, that country has a positive balance of payments; if, on the other hand, more money flows out than in, the balance of payments is negative. A country's international transactions are grouped into three (usually just the first two) categories to keep track of the myriad of flows.
Current account ::# Merchandise (tangible goods) ::# Services (invisible trade, eg. legal, consulting, royalties, patents etc.) ::# Factor Income (interest, dividend or any other foreign investment income) ::# Merchandise ::# Services ::# Factor income Capital account ::+ Exports ::− Imports ::− Increase of owned assets abroad ::+ Increase of foreign-owned assets in the country ::Money coming in (+), or leaving (−) :An account may show a Surplus or a Deficit . For example, a trade surplus implies that a country's exports are higher than its imports and hence there is a net flow of money ''into'' the country. A trade deficit, on the other hand, implies that the country's imports exceed its exports and hence there is a net flow of money ''out'' of the country. :For a country to have a ''zero balance of payments'', a Current Account deficit must be balanced by a Capital Account surplus. The United States has been carrying a negative current account balance for many years, this debt has been primarily financed by issuing securities. The only way to buy more than you sell is to Borrow the funds. :A country will have a negative balance of payments (i.e., there is to be a net flow of money out of the country) if the net of the current account and the capital account is a deficit. Similarly, there will be a positive balance of payments (i.e., a net flow of money into a country) if the net of the current and the capital account results in a surplus. Capital Account ::# Foreign Direct Investment (FDI) ::# Portfolio Investment ::# Other Investment (transactions in currency, bank deposits, trade credits etc.) ::# Statistical discrepancies HISTORY Historically these flows simply were not carefully measured, and the flow proceeded in many commodities and currencies without restriction, Clearing being a matter of judgement by individual Bank s and the governments that licensed them to operate. Mercantilism was a theory that took special notice of the balance in payments and sought simply to monopolize Gold , in part to keep it out of the hands of potential military opponents (a large "war chest" being a prerequisite to start a war, whereupon much trade would be embargoed). As mercantilism gave way to Classical Economics , these crude systems were later regulated in the 19th Century by the Gold Standard which linked Central Bank s by a convention to redeem "hard currency" in gold. After World War II this system was replaced by the Bretton Woods institutions (the International Monetary Fund and Bank For International Settlements ) which pegged currency of participating nations to the US Dollar , which was redeemable nominally in gold. In the 1970s this redemption ceased, leaving the system without a formal base. Some consider the system today to be based on Oil , a universally desirable commodity due to the dependence of so much Infrastructural Capital on Oil Supply . Since OPEC prices oil in US dollars, the US dollar remains a Reserve Currency , but is increasingly challenged by the Euro , and to some degree the Japanese yen. UNITED STATES BALANCE SEE ALSO EXTERNAL LINKS Data You can also download historical balance of payments information from 1960 under the "All Tables" link of the following page: |
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