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A Country's Inflows and Outflows of Funds
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Countries that engage in international trade experience inflows and outflows of products, services, currency purchases, and investments. The accompanying flows of money used to pay for these transactions are recorded in an accounting system called the balance of payments.The balance of payments consists of two main accounts: the current account and the capital account.
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The Current Account
The current account records the more common, daily, international transactions. It is subdivided into the following four smaller accounts:
1. The merchandise trade account.
The merchandise trade account includes imports and exports of tangible products, such as cars, computers, clothes, and televisions. If a country imports more tangible products than it exports, it experiences a trade deficit. If it exports more tangible products than it imports, it experiences a trade surplus.
2. The services account.
The services account includes flows of international money payments for services such as transportation, insurance, banking, consulting, and tourism.
3. The investment income account.
The investment income account reflects United States investment earnings from foreign stocks, bonds, and real estate, minus foreigners' investment earnings from United States stocks, bonds, and real estate.
4. The transfer payments account.
The transfer payments account includes gifts from American citizens to friends or relatives living abroad and vice versa. It also includes retirement payments (for example, a Social Security check) to a person living abroad, and vice versa.
A Debtor Nation
A country is called a "debtor nation" if its current account is negative. The United States became a debtor nation in the early 1980s primarily because its merchandise trade (exports minus imports) account became negative. Unlike popular belief, as we will see in the next section, this is not necessarily a bad thing for the country's overall economy.
The Capital Account
The capital account includes the following three sub-accounts all dealing with purchases and sales of financial assets, foreign currency, and real estate:
1. The foreign direct investment account.
The foreign direct investment account includes changes in direct investment transactions, such as land, buildings, and businesses.
2. The portfolio investment account.
The portfolio investment account includes changes in government and private equities (stock shares) and bonds purchases. In the current account, we include investment income, whereas in the capital account, we include the actual purchases of stocks and bonds.
3. The other investments account.
The other investments account includes transactions in private currency and bank deposits.
Some reports of the capital account include the official reserve account. However, the quarterly and yearly changes in this account are usually close to zero, so that this account is frequently not reported. The official reserve account includes official government-held gold reserves, government foreign exchange reserves, and strategic defense reserves (SDR), such as the strategic petroleum reserve.
The Balance on All Accounts is Zero
The balance on the capital account is the sum of the changes in the four capital account sub-accounts. This amount should equal the negative of the balance on the current account. If it does not, there is a statistical discrepancy. Given the size of the money flows and the difficulty in measuring the millions of international trade transactions, the discrepancy can be a substantial number. After taking the statistical discrepancies into account, the balance on all accounts combined is zero.
Please click HERE for the latest Bureau of Economic Analysis statistics on the United States Balance of Payments (click on "International", then "Balance of Payments"). As an example, below please find a summary of this information for the third quarter of 2010 and the third quarter of 2012.
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United States Balance of Payments, Quarterly, Seasonally Adjusted Data for Q3, 2010 and Q3, 2012 in Millions of Dollars
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| Current Account |
Exports of Goods
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325,198
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393,395
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Imports of Goods
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492,068
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567,294
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Merchandise Trade Balance (Trade Deficit)
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-166,870
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-173,899
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Exports of Services
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140,271
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159,124
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Imports of Services
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102,536
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109,713
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Services Trade Balance
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+37,735
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+49,411
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Investment Income Receipts, including compensation of employees
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171,310
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184,416
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Investment Income Payments, including compensation of employees
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123,532
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133,596
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Investment Income Balance
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+47,778
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+50,820
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Net Transfers of Government and Private Grants and Other Transfers
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–33,216
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-33,839
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| Current Account Balance |
-114,574
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-107,507
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| Capital Account |
U.S.-owned assets abroad, excluding financial derivatives (includes currency)
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294,523
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-229,774
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Foreign-owned assets in the United States, excluding financial derivatives (includes currency)
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512,515
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281,960
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Financial Derivatives, Net
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-11,893
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-6,406
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Capital Account Balance
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+206,099
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+45,780
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Statistical Discrepancy
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-91,379
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-61,727
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| Balance of Payments |
0 |
0 |
Source: United States Bureau of Economic Analysis, 2012
http://www.bea.gov/international/index.htm#bop (click on "U.S. International Transactions, 1960 - present)
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