The balance of payments refers to all monetary receipts and payments caused by a country's foreign economic exchanges and the settlement of foreign claims and debts in a certain period of time. It has a narrow sense and a broad sense. In a narrow sense, the balance of payments refers to the foreign exchange receipts and payments that must be settled immediately due to various foreign economic exchanges such as economy and culture in a certain period of time.
The generalized balance of payments refers to the sum of the monetary value of all economic activities between residents and non-residents of a country or region. It is a microcosm of a country's foreign political and economic relations, and it is also a reflection of a country's position and rise and fall in the world economy.
The balance of payments is usually reflected by the balance of payments table, which is a statistical table that systematically records the balance of payments items and finance of a country in a certain period of time. This statistical table is the basic information for countries to fully grasp their foreign economic exchanges, the main basis for the government to formulate foreign economic policies, and the economic environment that international marketers must consider when making marketing decisions.
What is the account structure?
Current account:
The current account summarizes the transactions between a country and its foreign trading partners through the purchase and sale of goods and services produced in the current period. If the United States has a current account surplus (positive number), it means that American residents sell more goods and services to foreigners than buy imported goods from foreigners. Therefore, American residents have the funds to lend to foreigners.
Usually, the current account of the United States is negative, or deficit. The current account deficit of the United States in 2009 was $378.4 billion. When there is a current account deficit, the United States must use this difference to pay for goods and services purchased from abroad. In short, the current account surplus or deficit must be balanced by changes in international loans or official reserve transactions.
Policymakers have been worried that the huge current account deficit of the United States in the 1980, 1990 and 2000 years caused the United States to rely heavily on savings from abroad to finance domestic consumption, investment and the federal budget deficit. What is particularly worrying is that since 2005, China has become increasingly dependent on the funds of foreign central banks rather than private investors.
One of the main reasons for the US current account deficit in the 2000s may be the global "savings surplus". To some extent, the savings surplus is the result of high savings rates in countries such as Singapore, where the population is aging, thus increasing retirement savings.
In addition, the level of global savings has improved, because since the late 1960s, with the rising income level, China, South Korea and other Asian countries and some developing countries such as Eastern European countries have also increased their savings. Due to the high savings rate and relatively limited investment opportunities, funds from these countries flowed into the United States, which increased the value of the dollar. The high value of the dollar has reduced American exports and increased imports, resulting in the current account deficit.
Financial account:
Financial accounts measure the transactions of existing financial or physical assets between countries. When someone in a country sells an asset (such as a skyscraper, bond or stock) to a foreign investor, the transaction is recorded as capital inflow in the balance of payments account, because funds flow into the country to buy assets.
When someone in a country buys an asset from abroad, the transaction is recorded as capital outflow in the balance of payments account, because the funds flow out of the country to buy the asset. For example, when a wealthy China entrepreneur bought a duplex apartment in Trump Tower in new york, the transaction was recorded as capital outflow from China and capital inflow from the United States.
The balance of the financial account is equal to the capital inflow minus the capital outflow plus the net value of capital account transactions. The capital account is mainly composed of debt relief and financial assets transfer when immigrants enter the United States. [1] If American residents sell more assets to foreigners than they buy from foreigners, then the financial account is in surplus.
If American residents buy more assets from foreigners than they sell to foreigners, then the financial account is in deficit. In 2009, the US capital inflow was $356.5 billion, and the capital outflow was $654.38+$040.5 billion. Together with the net capital account transaction of $654.38 billion, the net balance of financial account (the increase of American assets held by foreigners) is $2,654.38 billion+59 million.
Official settlement account:
Not all capital flows between countries represent transactions between households and enterprises. Changes in assets held by the government and the central bank have supplemented private capital flows. Official reserve assets are assets held by the central bank for international payment and settlement of international payments and implementation of international monetary policy.
Historically, gold was the main official reserve asset. At present, the official reserves are mainly government securities of the United States and other industrialized countries, deposits of foreign banks and special assets called Special Drawing Rights (SDRs) created by the International Monetary Fund (an international institution we will discuss later in this chapter). Official foreign exchange settlement is equal to the net increment of a country's official reserve assets (domestic holdings minus foreign holdings).