The balance of international payments accounts is a statistical record of economic transactions between residents of the United States and residents of the rest of the world. The measurement is in terms of dollars and in terms of fixed time periods during which the transactions take place. The transactions involve:

Merchandise-movable goods such as wheat, machines, or automobiles. Services-intangible output that is regarded as being transferred at the instant of performance, such as transportation, insurance, and by convention, the yields on international invest

ments which are considered as fees for the use of capital.

Private and governmental capital including financial claims and ownership of property.

• Monetary gold, which is a physical commodity, but is treated in the balance of payments in the same manner as a financial asset.

An international transaction may involve the exchange of one asset (commodity, service, or capital) for another, or it may involve a gift of an asset. By recording the offsetting figures for exchange and creating a special category of unilateral transfers as the offset for gifts, the balance of payments is presented as a double-entry record, similar in many ways to ordinary business accounts.

The credit items represent the transfer to nonresidents of real or financial assets or services. The debit items represent the acquisition from nonresidents of these same types of assets or services.

and claims on a foreign person, company, bank, or government is a debit item.

• The acquisition of an asset in the United States by foreigners, in contrast, is a credit item.

• Repayment of a debt is treated as the reacquisition of the debt instrument. So repayment of debt by a foreigner is a credit item, while U.S. repayment of debt to a foreigner is a debit item. The process of settlement varies from case to case. For example, a U.S. commodity export, which is a credit, gives rise to an equal claim of the United States on foreign

ers, which is entered as an associated debit. The means of settling the claim will vary. Possibilities include:

An increase in the U.S. holdings of financial assets-liabilities or IOU's of foreigners to U.S. residents. This is the same as an increase in U.S. investment abroad.

• A decrease in foreign holdings of assets in the United States (for example, payment out of a foreign deposit in a U.S. bank). Since these assets are liabilities of U.S. residents, their decrease is a decrease in foreign investment in the United States.

The use of the double entry principle of bookkeeping means that the total of debits equals the total of credits, if the records are perfect. In this sense, the balance-ofpayments data must always balance. The actual collection of statistical data, however, is from a wide variety of sources, and it is necessary to make estimates of some

are as follows:

• A U.S. export of merchandise is a credit item, and a U.S. import of merchandise is a debit item.

• A service performed by U.S. residents for foreigners (such as the sale of services to foreign travelers in the United States) is a credit item, and a service performed by foreigners for U.S. residents (such as for U.S. residents traveling abroad) is a debit item.

• A U.S. unilateral transfer to a foreigner is a debit item matching the credit item of the physical asset, service given, or financial asset. • The acquisition by a U.S. resident of an asset abroad, including property

entries are not exactly offsetting and a balancing item-errors and omissions-is required.

Credits are counted as positive, and debits as negative. If, then, the balancing item required to make the algebraic sum of credits and debits equal to zero is positive, it indicates that total credits have been underestimated, total debits have been overestimated, or some combination of these effects has occurred.

The entries in the quarterly report of the U.S. balance of payments published in the Survey of Current Business are shown in Table 2, p. 27. The terms defined in this chapter are organized in the order of the line numbers in the table.

Relation of Balance of Payments and National Income and Product Accounts

The classifications of the U.S. Balance of Payments Accounts have been made in such a way as to make it possible to integrate their results with the National Income and Product Accounts. In the income and product accounts the four major transacting groups are households, business, government, and the rest of the world. The balance of payments records transactions with the last named sector.

The sum of the purchases of these four groups must equal the national output of goods and services plus imports of goods and services.

Gross National Product, however, is defined as the market value of the output of goods and services produced by labor and property supplied by the Nation's residents. Therefore, the GNP figure includes exports of goods and services, but excludes imports of goods and services.

Net foreign investment equals the balance of recorded transactions in goods, services, and unilateral transfers plus allocations of special drawing rights (SDR)designated in the national income and product accounts as "capital grants received by the United States". This is equal to the acquisition of foreign assets by U.S. residents less the acquisition of U.S. assets by foreign residents plus the balance on unrecorded transactions (errors and omissions).

Balances of Payments

It is not possible to define a single balance which can adequately represent the underlying balance-of-payments position of the United States. It follows that equilibrium in the external position of the United States cannot be equated with zero in any one of the possible balances, in either the short run or the long run. Rather, it appears that presentation of a spectrum of balances permits a more accurate description of the evolving pressures on the dollar and of developments in the U.S. payments position, and that, for analytical purposes, the trends in the balances are often more significant than their levels.

It might also be noted that a complete analysis of external developments should take into account our investment position

as well as balance-of-payment flows. The balance of payments records the flows of goods, services, transfers, and capital during a given period; the investment position gives the net excess of external assets over liabilities at the end of the period, as well as the structure of assets and liabilities by type. Data on the investment position are now available only annually but BEA is developing quarterly data.

Regularly computed balances of payments are as follows (line numbers refer to table 1):

The balance on goods and services measures net exports of goods and services from the United States and is a component of the U.S. Gross National Product (line 11).

The balance on goods, services, and remittances also takes into account unilateral transfers other than U.S. Government Grants (line 13).

The balance on current account is the net export of goods and services and all unilateral transfers to foreigners (line 15). In combination with the allocations of SDR (line 31), it measures net foreign investment.

The balance on current account and long-term capital is the sum of the current account-net exports of goods and services minus all unilateral transfers to foreigners-plus net flows of private longterm capital and of U.S. and foreign government capital other than changes in U.S. official reserve holdings and foreign official reserve holdings in the United States (line 26).

The net liquidity balance is the sum of the balance on current account and longterm capital plus net flows of short-term nonliquid private capital, allocations of SDR, and errors and omissions (line 33). Alternatively, one can focus on the "below

the line" items that finance the net liquidity balance. From this perspective, it is measured by net flows of U.S. and foreign private liquid funds plus changes in U.S. reserves and in foreign reserves held in the United States.

The net liquidity balance differs in two ways from the "liquidity balance" used for a number of years. For one thing, an increase in liquid claims (to the extent they are recorded) accompanied by a simultaneous increase in liquid liabilities has no effect on the net liquidity balance but increases the deficit on the liquidity balance. A second difference is that changes in nonliquid liabilities to foreign official agencies distort the liquidity balance but do not distort the net liquidity balance. As a result of these two differences, the net liquidity balance serves the purpose intended better than the liquidity balance.

Both the balance on current account and long-term capital and the net liquidity balance attempt to focus on more fundamental, longer term trends in the external position of the United States. Neither is quite successful. Both are affected not only by the limitations of the statistical reporting system and other technical difficulties, but also by the complications resulting from the dollar's role as an international currency. That role results in considerable ambiguity as to what measure, if any, and what level of the measure would indicate fundamental long-term equilibrium in the external accounts of the United States. For instance, a deficit on the net liquidity balance does not necessarily imply disequilibrium in the external position, for a net buildup in liquid dollar holdings by private foreigners may simply reflect the use of the dollar as an international medium of exchange. Because of the difficulties involved, there was some

question as to whether either balance should be calculated. Nevertheless, given the need for indicators of underlying trends, it appears that the two balances in combination, particularly when they move together, are the best available, although neither is of a theoretical or statistical quality sufficient to carry the weight of being the balance of payments, nor is there a presumption that either should be zero.

The net liquidity balance plus net flows of U.S. and foreign private liquid capital sum to the official reserve transactions balance (line 42). It is financed by changes in U.S. official reserve assets plus changes in liquid and nonliquid liabilities to foreign official agencies. The balance is intended to indicate the net exchange market pressure, assuming relatively fixed exchange rates, on the dollar during the reporting period resulting from international transactions of the United States. (Exchange market pressure, in this sense, reflects the net influence of all transactions "above the line" in the calculation of the official reserve transactions balance.) Of course, foreign central banks themselves may wish to increase or decrease their dollar holdings, and to that extent a deficit or surplus does not necessarily indicate disequilibrium in the U.S. position.

It should be noted, however, that certain types of transactions between foreigners in the Eurodollar market can have the effect of increasing dollar liabilities. Thus, the dollar could have come under pressure in the exchange market even though transactions of U.S. residents with foreigners and the official reserve transactions balance were in equilibrium.

Major international transactions and the balances are presented in table 1 which is arranged so that each balance is the sum of the items above it.

52

53

54

42

-1,807

45

-555

51

-58

63

717

64

-10,927

-22,002

-7,763

-1,072

-566

46

-506

55

1. Adjusted to balance of payments basis; excludes exports under U.S. military agency sales contracts and imports of U.S. military agencies.

2. Includes fees and royalties from U.S. direct investments abroad or from foreign direct investments in the United States. 3. Equal to net exports of goods and services in national income and product accounts of the United States.

4. The sum of lines 15 and 31 is equal to "net foreign investment"

in the national income and product accounts of the United States. 5. Includes some short-term U.S. Government assets. NOTE.--Details may not add to totals because of rounding. SOURCE:-U.S. Department of Commerce, Bureau of Economic Analysis.