Question

2. Current, financial, and capital accounts

Consider the following table showing hypothetical balance-of-payments data for the United States.

Complete the table by selecting the correct value for each missing entry.

	Balance-of-Payments
	(Billions of dollars)
Current Account
U.S. merchandise exports	+65
U.S. merchandise imports	-68
Merchandise trade balance			-3
U.S. service exports	+30
U.S. service imports	-65
Services balance			-35
Goods and services balance			-38
Net investment income from abroad	-2
Net unilateral transfers	-5
Current account balance			-45
Capital and Financial Account
Change in U.S.-owned assets abroad	-38
Change in foreign-owner assets in the U.S.	+48
Capital and financial account balance			+10
Statistical discrepancy			+35
Trade balance			0

[Although the work is done at the top, please make sure to check that it is correct. Thanks! Pick one for each bracket below]

Suppose an Argentine citizen gives money to his brother in the United States. This would be entered as a [ debit / credit] item under the [ U.S. merchandise imports / U.S. merchandise exports / net unilateral transfers] section of the U.S. current account.

According to the table, the United States is running a trade [ surplus / deficit].

The current account balance suggests that U.S. current account transactions created outpayments of foreign currencies from the United States that were [equal to / less than / greater than] the inpayments of foreign currencies to the United States.

Any surplus or deficit in one account must be offset by deficits or surpluses in other balance-of-payments accounts. Because the current account is in [surplus / deficit ] the excess of U.S. currency held by foreigners must either be loaned to Americans or used to buy American stocks or bonds. All of these transactions are then recorded in the [current / capital and financial] account. Since any imbalance in one account automatically leads to an equal but opposite imbalance in the other, the balance-of-payments is always [zero / positive / negative ].

Answer 1

1.) Suppose an Argentine citizen gives money to his brother in the United States.

This would be entered as a [credit] item under the [net unilateral transfers] section of the U.S. current account.

An entry is debited when it leads to the money leaving the country while it is credited when it comes to the country. And since Argentine citizen has given money to his brother, it is not in return of any goods or services. Therefore it is a unilateral transfer that is considered to be a transaction without any merchandise or service involved.

Therefore this will be entered as a credit item into the net unilateral transfers sections of the US current account.

2.) According to the table, the United States is running a trade deficit.

The trade balance is the difference between the export and import of goods and services. A country that imports more goods and services compared to what it exports has a deficit trade balance. And a country whose exports exceed imports has a trade surplus.

Trade balance = Exports - Imports   (Goods/ merchandise and services)

Or it is the same as the goods and services balance.

Notice here we will only take imports and exports of goods and services. And the amount received on the factors of production and net unilateral transfer would not be included.

As we can see that the table above shows a negative balance for trade balance. Therefore the U.S has a negative trade balance. It is characterised as a trade deficit.

3.) The current account balance suggests that U.S. current account transactions created out payments of foreign currencies from the United States that were greater than the in payments of foreign currencies to the United States.

Here, the current account displayed a negative balance. A negative current account balance or current account deficit means that the out payments exceed the inpayments. Therefore here,

Current account out payment or foreign currency outflow > Current account in payment or foreign currency inflow.

Therefore the foreign currency outpayments are greater than the inpayments of U.S

4.) Any surplus or deficit in one account must be offset by deficits or surpluses in other balance-of-payments accounts. Because the current account is in deficit, the excess of U.S. currency held by foreigners must either be loaned to Americans or used to buy American stocks or bonds.

As the balance of payment's balance must be zero, meaning that one accounts deficit is balanced by another account surplus. Since here the U.S has a current account deficit, therefore it means that it must be offset by capital account surplus. And in order for the capital account to be surplus, the excess currency held by the foreigners lead to capital inflow. Or capital account credit. Therefore foreigners must either loan the excess U.S currency to Americans or invest in the capital stocks in America.

5.) All of these transactions are then recorded in the capital and financial account.

The transactions we discussed above are of capital nature. As they lead to changes in assets or liabilities. therefore they will be recorded in capital and financial account. In the above case, the it is capital inflow and leads to an increase in the capital asset, or credit in the capital or financial account.

6.) Since any imbalance in one account automatically leads to an equal but opposite imbalance in the other, the balance-of-payments is always zero.

Without any government and central bank intervention, the balance of payments always has a zero balance. That is one accounts deficit or surplus is balanced by the other's surplus or deficit respectively. It means that it is always balanced and total credits are equal to the total debits. The outflow equals to the inflow. Any imbalanced if occurred is balanced by the statistical discrepancy that eliminates the errors in the measurement.

The above balance of payments table: