Thomas A. Pugel： Understanding F

【Payments among Nations】

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The Important Difference in Economics

Nations are like regions or families. They are sovereign, meaning that no central court can enforce its will on them with a global police force. Being sovereign, nations can put all sorts of barriers between their residents and the outside world. A nation can have its own currency, its own barriers to trading with foreigners, its own government taxing and spending, and its own laws of citizenship and residence. The special nature of International Economics makes it fascinating and sometimes difficult: Imports of Automobile Tires, Immigration, China`s Exchange Rate, Global Financial and Economic Crisis.

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International Transactions: trades in financial assets like bonds, loans, deposits, stocks, and other ownership rights ; trades in the exchange of money for a good, 'service', or a different financial asset. The scorecard is the balance of payments, the set of accounts recording all flows of value between a nation's residents and the residents of the rest of the world during a period of time. In addition, the exchanges documented in the balance of payments have major implications for macroeconomics concerns like growth inflation, and unemployment.

• Accounting Principles: In balance of payments accounting, we need to keep track of flows of value both in and out of the country and arbitrarily assign a positive sign to one direction and a negative sign to the other direction: A credit item is an item for which the country must be paid (measured with a positive sign). A debit item is an item for which the country must pay (measured with a negative sign).

• Balance of Payments: the current account, the financial account, and changes in official international reserves, Statistical Discrepancy.

-- The macro meaning of CA: the countrys account balance must equal net foreign investment I_f, the increase in the countrys foreign financial assets minus the increase in the countrys foreign financial liabilities. A countrys current account balance also is linked to domestic production, income, and expenditure. A country`s current account balance is the difference between its domestic production of goods and services ad its total expenditures on goods and services.

Recall from basic macroeconomics that domestic production of goods and services Y equals the demand for the country`s production, Y= C+I_d+G+X-M.

To summarize, the current account balance turns out to be equal to three other things:

i. CA_1={Net foreign investment}= I_f;
ii. CA_2={The difference between national saving and domestic investment}= S-I_d;
iii.CA_3={The difference between domestic product and national expenditure}= Y-E.

-- The macro meaning of Overall Balance: The overall balance should indicate whether a country`s balance of payments has achieved an overall pattern that is sustainable over time. Unfortunately, there is no one indicator that represents overall balance perfectly. The official settlements balance measures the sum of the current account balance plus the nonofficial financial account balance, B=CA+FA.

Because all items in the balance of payments must sum to zero, any imbalance in the official settlements balance must be financed or paid for through official reserves flows: B+OR=0.

If the overall balance B is in surplus, it equals an accumulation of official reserve assets by the country or a decrease in foreign official reserve holdings of the countrys assets. If the overall balance is in deficit, it equals a decrease in the countrys holdings of official reserve assets or an accumulation of foreign official reserve holdings of the countrys assets. The official settlements balance measures the net flows of all private transactions in goods, services, income, transfers, and nonofficial financial assets. Most of the transaction by countries monetary authorities that result in changes in official reserve holdings are official intervention by these authorities in changes in OR are official intervention by these authorities in the foreign exchange markets.

• The International Investment Position
  A nations International Investment Position shows its stocks of international assets and liabilities at a moment in time. These stocks are changed each year by the flows of private and official assets measured in the balance of payments. As a result of large current account deficits since the early 1980s, the United States switched from being the worlds largest net creditor to being its largest net debtor.

The link between the two kinds of accounts relates to a subtle but common semantic distinction. We say that a nation is a lender or a borrower depending on whether its current account is in surplus or deficit during a time period. We say that a nation is a creditor or debtor depending on whether its net stock of foreign assets is positive or negative. The first set of terms refers to flows during a period of time, and the second set to stocks at a point in time.