International Finance Theory and Policy
by Steven M. Suranovic

Finance 5-8

US Balances on the Balance of Payments - 2002

The following table reports a number of noteworthy balance of payments "balances" for 2002. In effect these sub-account balances allow us to identify net inflows or outflows of specific categories of goods, services, income and assets. Click here to see the US balances for the year 1997.

Balances on the US Balance of Payments -2002
(millions of $, seasonally adjusted)
(credits +, debits -)

Lines 1 + 18 + 35 Current Account Balance -480,861
Lines 3 + 20 Trade (Goods) Balance -482,872
Lines 4 + 21 Services Balance 64,834
Lines 12 + 29 Investment Income Balance -3,970
Line 39 Capital Account Balance -1,285
Lines 40 + 55 Financial Account Balance 527,998
Line 70 Statistical Discrepancy -45,852

The sum of lines 1, 18 and 35, (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 2002 in the US, the CA balance was - 480 billion dollars where the minus sign indicates a deficit. Thus, the US recorded a current account deficit of $480 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 3 and 20, 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 2002 the US recorded a trade deficit of over $482 billion. This means that the US imported more physical goods than it exported.

The sum of lines 4 and 21, 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 $64 billion in 2002. In other words, the US exports more services than it imports from the rest of the world.

The sum of lines 12 and 29, 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 2002 there was a recorded investment income deficit of over $3 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 lines 12 and 29. GNP includes both lines. To be more explicit GNP = C + I + G + EX - IM where EX - IM includes income payments, receipts and unilateral transfers. In other words one would plug in the CA balance into the national income identity to derive GNP. On the other hand, GDP = C + I + G + EX - IM where EX - IM represents only net exports of goods and services. GDP will exclude lines 12 and 29 as well as unilateral transfers. + (line 12) + (line 29) [maintaining signs]. In the US, GDP is generally very close in value to GNP.

The sum of lines 40 and 55, i.e., US assets abroad and foreign assets in the US, represents the financial account balance. In 2002 the US recorded a financial account surplus of over $527 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.

Finally, line 70 records the 2002 US statistical discrepancy as a $45 billion debit entry. This implies that recorded credit entries on the balance of payments exceeded recorded debit entries. Thus, an additional $45 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 $45 billion, but, this does not follow. The discrepancy only records the net effect. It is conceivable that $100 billion of debit entries and $55 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 1/11/04

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