International Finance Theory and Policy
by Steven M. Suranovic

Finance 5-8 (1997)

US Balances on the Balance of Payments - 1997

The following table reports a number of noteworthy balance of payments "balances" for 1997. In effect these sub-account balances allow us to identify net inflows or outflows of specific categories of goods, services, income and assets.

Balances on the US Balance of Payments -1997
(millions of $, seasonally adjusted)
(credits +, debits -)

Lines 1 + 15 + 29 Current Account Balance -155,215
Lines 2 + 16 Trade (Goods) Balance -197,954
Lines 3 + 17 Services Balance 87,748
Lines 11 + 25 Investment Income Balance -5,318
Lines 33 + 48 Capital Account Balance 254,939
Lines 34 + 39 + 49 Government Assets Balance 14,981
Lines 43 + 56 Private Assets Balance 239,958
Lines 44 + 57 Direct Investment Balance -28,394
Line 64 Statistical Discrepancy -99,724

The sum of lines 1, 15 and 29, (i.e., exports of goods, services and income, imports of goods services and income, and unilateral transfers, (maintaining signs)), represents the current account (CA) balance. In 1997 in the US, the CA balance was - 155 billion dollars where the minus sign indicates a deficit. Thus, the US recorded a current account deficit of $155 billion. Note that the current account balance is often reported as the "trade balance using a broad measure of international trade." Because unilateral transfers are relatively small and because investment income can be interpreted as payments for a service, it is common to say that a current account deficit means that imports of goods and services exceeds exports of goods and services.

The sum of lines 2 and 16, i.e., exports of goods and imports of goods, is known as the merchandise trade balance, or just trade balance for short. In the US in 1997 the US recorded a trade deficit of over $197 billion. This means that the US imported more physical goods than it exported. Notice that the trade deficit is larger than the current account deficit. The current account deficit is smaller mostly because the service balance has a sizeable surplus.

The sum of lines 3 and 17, service exports and service imports, represents the service trade balance or just service balance. The table shows that the US recorded a service surplus of over $87 billion in 1997. In other words, the US exports more services than it imports from the rest of the world.

The sum of lines 11 and 25, income receipts on US assets abroad and income payments on foreign assets in the US, represents the balance on investment income. In the US in 1997 there was a recorded investment income deficit of over $5 billion. This means that foreign residents earned more on their investments in the US than US residents earned on their investments abroad.

The investment income balance also represents the degree to which a country's GDP differs from its GNP. GDP excludes line 11 but includes line 25. GNP includes line 11 but excludes line 25. This implies that GNP = GDP + (line 11) + (line 25) [maintaining signs]. Since the sum of lines 11 and 25 are negative, it means that US GDP in 1997 exceeded US GNP by just over $5 billion; not much of a difference given that GDP was over $8,000 billion.

The sum of lines 33 and 48, i.e., US assets abroad and foreign assets in the US, represents the capital account balance. In 1997 the US recorded a capital account surplus of over $254 billion. A surplus on capital account means that foreigners are buying more US assets than US residents are buying of foreign assets. These asset purchases, in part, represents international borrowing and lending. In this regard, a capital account surplus implies that the US is borrowing money from the rest of the world.

The sum of lines 34, 39 and 49 shows the balance on government asset purchases. In 1997, the US recorded a $14 billion government assets surplus. This means that foreign governments and central banks purchased more US assets than the amount of foreign assets purchased by the US government and central bank.

The sum of lines 43 and 56; i.e., US private assets and foreign private assets in the US, shows the private asset balance. In 1997, the US recorded a $239 billion private asset surplus. This accounted for most of the US capital account surplus. It indicates that private individuals and businesses abroad, purchased more of out assets than we purchased abroad (in part, they lent us more money than we lent to them).

The sum of lines 44 and 57 gives the balance on direct investment. In 1997 the US recorded a $28 billion direct investment deficit. This means that US businesses engaged in more direct investment abroad than foreigners did in the US.

Finally, line 64 records the 1997 US statistical discrepancy as a $99 billion debit entry. This implies that recorded credit entries on the balance of payments exceeded recorded debit entries. Thus, an additional $99 billion debit entry is needed to make the accounts balance.

The presence of a statistical discrepancy means that there are international transactions that have taken place but have not been recorded or accounted for properly. One might conclude that the size of the errors is $99 billion, but, this does not follow. The discrepancy only records the net effect. It is conceivable that $200 billion of debit entries and $101 billion of credit entries were missed. Thus one should be wary if someone argues that the discrepancy is less than 5% of total trade since this may not be recording the full extent of the errors.

Based on the way the balance of payments data is collected, it seems likely that the primary source of the statistical discrepancy is on the capital account side rather than the current account side. This is because trade in goods, the primary component of the current account, is measured directly and completely by customs officials, while capital account data is acquired through surveys completed by major banks and financial institutions. This does not mean that errors cannot occur, however. Goods trade is tangible and thus is easier to monitor. Capital transactions, in contrast, can be accomplished electronically and invisibly and thus are more prone to measurement errors. Service and income transactions on the current account are also likely to exhibit the same difficulty in monitoring, implying that errors in the current account are more likely to arise in these sub-categories.

International Finance Theory and Policy - Chapter 5-8: Last Updated on 8/20/98

PREVIOUSNEXT