Balance of payments ; International trade

Charles Pigott

English

Research Papers in Economics

April 20, 1984
If, in any year, total U.S. payments to
foreigners on acurrent basis exceed our
receipts from them (that is, we run a current
account deficit), ourcountry must borrow
from abroad to make upthe difference.
Conversely, we must lend to foreigners any
difference between oursales to them on a
current basis and our payments. The current
account surplus ordeficittherefore also
measures the tietamounttheU.s. as awhole
is lending to or borrowing from abroad
during a given year. Last year, we ran a
current accountdeficitof$40.8 billion; this
means thatwe borrowed a net amountof
$40.8 billion from abroad.
The current account includes all transac-
tions that are "current" in an accounting
sense, that is, all payments and receipts for
goods and services exchanged with .
foreigners, as well as transfers. Excluded
from the current account are u.S. purchases
fromorsales toforeigners offinancial orreal
assets. These items, which represent u.S.
entities' lendingto or borrowing from
foreigners, comprise the capital accountof
the U.S. balance ofpayments.
The current account itself, though, contains
three distincttypes oftransactions:
merchandise trade, productive services
provided by land, labor, and capital; and
transfers, which include foreign aid and
private remittances as well as payments to
foreigners of interest on their holdings of
u.s. governmentdebt: These, in turn, are
"arranged'! intothe three basic balances-
merchandise trade, GNP netexports of
goods and services, and, finally, the current
account balance itself.
Merchandisetrade balance
The merchandise trade account contains all
exports and imports oftangible commod-
ities, e.g., agricultural products, industrial
materials such as steel, consumer manufac-
tures, and capital goods. Actual merchan-
Which Trade Balance?
Neithermedia inaccuracy norgovernment
revisions can be blamed for these
discrepancies. Rather, what is commonly
referred toas "thetrade balance" is actually
measured and reported in several different
ways. Anyonewantingto knowthis balanc:e
has the following choices: the merchandise
trade balance, itselfmeasured in several
ways; "GNP netexports", which gives the
balance oftrade in merchandise and
services; orthe current accountbalance.
While these balances generally move
closely together overtime, their levels are
typically very different. For example, itwas
the merchandise balance that.was $60.6
billion in deficit last year, whilethe current
account and GNP net exportdeficits were
$40.8 and $7.1 billion, respectively. For
those whostiII wanttoknowwhatthedeficit
really was, this Letter provides a short
IIguide to the perplexed", explaining the
various balances, their relation to one
another, and their economic significance.
In February, newspapers across the nation
reported thatthe U.s. "trade" deficitfor
1983 was $60.6 billion. A month laterthey
reported a 1983 "trade" deficitof$40.8
billion. Butthe national income account
data given in the recentSurvey ofCurrent
Business Iists still another version ofthe
"trade"deficit-$7.1 billion. Will the real
trade deficit please stand up?
Humpty Dumpty: "When Iuse a word,
itmeans just what Ichoose itto mean,
neither more nor less." (Lewis Carroll,
Through the Looking Glass.)
Current account
The most comprehensive summary ofu.s.
trade with the rest ofthe world is given by
the current account balance. Indeed, the
current accountcontains the other balances
mentioned above and all the transactions in
them.",:r,rp~';('n in this n0.~\vslen{;)rd()not
'H"·"'~',,·"·ll" reiled lhe view'> of the
}·""'!tCC""I i<eserve of San FeH''''",,,n
or of lhe Hoard of Covernors of llw Feder,,1
Reserve System,
dise trade figures are reported several
different ways depending on the extentto
which various services involved in trans-
porting them are included.
Imports and exports on a "free-along-side"
(f.a.s.) basis are valued as delivered to their
pointofembarkation for ordeparture from
the U.S. The f.a.s. figures are thus the purest
measures ofthe values ofthe commodities
themselves. Otherexport/importfigures
refer to their value "free-on-board" (f.o.b.),
that is, inclusiveofloadingand related costs.
Still other figures includethe "costof
insurance and freight" (cU.) in addition to
the loading costs and the aCtual (La.s.)
commodity value.
The first merchandise trade balance figures'
. reported each month by the Commerce
Department, and the ones most frequently
quoted in the media, are the "census"
figures based on the export and import
invoices recorded at various U.s. customs
stations. These figures value imports at their
pointofentry intothe U.s., that is, on acLf.
basis, while they value exports on an f.a.s.
basis. (Commerce reports the balance on an
f.a.s. basis forboth exports and imports
several days following the release ofthe
census data.) The census balance thus
includes the transport and other service
costs ofbringing imports to the U.S. but
excludes the service costs involved in
getting ourexports abroad. Notsurprisingly
then, last year's census-based deficitof $69
billionwas substantially largerthan the f.a.s.
merchandise deficitof $60.6 billion..
Services
Services provided by factors ofproduction
-land, labor and capital-arethe second .
majorcategoryoftransactions inthe current
account. Included in such "factor" services
are personal travel and tourism, royalties
and otherfees from professional services, as
well as all services associated with trans-
porting and insuring U.s. merchandise
trade.
2
However, the largest and most rapidly
growing componentoffactor services
represents payments for services provided
by physical capital. These include recorded
earnings from u.s. investments abroad as
well as payments to foreigners on their
investments in the U.s., except for the
interest they earn on their holdings ofU.S.
goverrfment (federal, state and local) debt.
Interest payments to foreigners on govern-
mentdebt are not included in these services
(although they are included in the current
account) because, according to U.S.
national income accountingconventions,
they represent a transfer rather than a
payment for a current factor service.
Overall, the service balance typically
records a large surplus, nearly $54 billion in
1983. This mainly reflects the fact thatthe
U.S. earns considerably more on its invest-
ments abroad than itpays to foreigners on
their investments here. Indeed, our reported
investment receipts totaled $85 billio'llast
year (nearly two-thirds ofall service.
exports), exceeding payments toforeigners
on their investments in the U.S. by nearly
$47 billion.
Thesum ofthe (f.a.s.) merchandisetrade and
service balances yields what is known as
"GNP net exports." This is the net export
figure given in the U.S. national income
statistics and it is one ofthe four major
components of U.S. GNP.
Transfers and the remainder
The remainderofthe current account
consists ofunilateral transfers such as
private contributions, pension payments,
official foreign aid, as well as interest
payments to foreigners on their holdings of
U.S. governmentdebt. The U.S. always runs
a large deficitoverall in these items,
amountingto nearly $33 billion in 1983, $18
billion ofwhich represented U.S.
government interest paid to foreigners.
Meaning
On this basis, last year's $41 billion current
accountdeficitwas the sum ofour $61Minus sign means dllltcil
Merchandise Trade·
BIllions of Dolllll'$
30
20
10
of"'oo;::""i~+-"r'r't:::'!-r-'""'+-T
.10 Net Exports·
·20
·30
·40
·50
·60
·70 ..............-'-'-".......-'-.......-.............
1970 1972 1974 1976 1978 1980 1982
°NallonallntomeAccounls(I,a.s.) basis
Chart 2'
The Balances
Likewise, concern is growingthattheU.S. is
borrowing from abroad at an unsustainably
high rate through the current account. This
has led several observers to predict a sharp
decline in the dollaron the foreign
exchanges in 1984 (to bringthe current
accountto a more sustainable level). Thus,
for financial markets these days, the "trade"
balanceto watch is mainly ourcurrent
account.
Charles Pigott
difference between foreign purchases of'
U.S. goods and services and U.S. purchases
offoreign goods and services. As such,
variations in GNP netexports have a direct
and potentially substantial impacton the
growthofournational output. As theforeign
sector has grown in importance to the u.s.
.economyoverthe last decade, forecasts of
U.S. growth have become increasingly
sensitive to assessments ofGNP netexports.
Finally, the current account's significance
lies mainlyin the factthat itmeasures thenet
flow ofu.s. lendingtoorborrowing from
abroad, and hence, the change overtime in
net U.S. indebtedness to foreigners. (The
U.S. is still anetclaimanton abroad, butthis
couId change ifour present deficits persist.)
This flow, in turn, has potentially very
important implications forfinancial
conditions in the U.s. and for the value of
the dollaron the foreign exchanges. In
particular,the nearly $41 billion in funds the
U.S. "imported" from abroad last year
helped to meetthe credit needs ofour
private sector and the growing demand for
credit bythe federal government. Upward
pressures on U.s. interest rates would
probably have been greater had these
foreign funds not been available.
3
Current
AccDunt
- $40.8
Merchandise Trade Services
-$60.6 + $53.5
GNP Net
)
Exports
-$7.1
Transfers
- $33.6
Our merchandise trade balance has been in
deficit in all buttwoofthe last fourteen
years, while the current accountand GNP
net exports have more often been in surplus
(Chart2). This pattern is duetothe large U.s.
surplus infactorservices-asurplusthathas
grown very quickly in recent years mainly
because ofthe rapid increase in receipts
from our investments abroad. The services
surplus means that the u.s. can have a
substantial trade deficiteven in years when
ourtotal current international payments and
receipts (the currentaccount) are in balance.
Interestingly, the situation is the opposite for
several ofourtrading partners. Japan, for
example, typically runs a substantial deficit
in services. Its merchandise trade therefore
may be in surplus, as is usually the case,
even when its current account is in deficit.
Although the merchandise trade balance
gets the most media attention, the GNP net
export and current account balances are
moreeconomicallysignificant. In particular,
GNP netexports provide the best summary
measure ofthe foreign sector's impacton
U.S. output and employment~ while the
current account balance measures the
impactoftheforeign sectoron u.s.financial
markets, includingthevalueofthedollaron
the foreign exchange markets.
billion merchandise trade deficit, the $54
billion surplus on factor services (together
making upthe $7 billion deficiton GNP net
exports), and our $33 billion deficit in
transfers and U.S. government interest pay-
ments to foreigners (Chart 1).
Chart 1
Components of the Current Account: 1983
IBll1lons al Oollars}
GNP net exports comprise one ofthe four
major components of U.S. GNP (along with
private consumption and investment, and
governmentexpenditures), measuring theSSV1::> .lS~I:J
u018uI4SPM.4Pln • u08aJO • ppPAaN • 04PPI
IIPMPH • PIUJoJllPJ puozpV. P>jsPjV
'l!I!!;) 'OJSPU!!J:I U!!S
lSL 'ON IIW}!:!d
CIIVd :!!)VISOd 's'n
llVW SSVl:) IS}!I:I
O:II}!OS:!}!d
BANKING DATA-TWELFTH FEDERAL RESERVE DISTRICT
(Dollaramounts in millions)
CG):J)~~~\ill~elldI \ill~CS
~CG) ~\ill~cgr
~,6\ell~~~CQI TI~ell~1P~dI
{\ lill~m{\Jlw:<dl~@ \\iI:DJlW:~~~CQI
SelectedAssetsand Liabilities
largeCommercial Banks
Amount
Outstanding
4/04/84
Change
from
3/28/84
Change from 12/28/83
Percent
Dollar Annualized
Loans,Leases and Investments1 2 177,973 1,323 1,948 4.1
Loans and Leases1 6 157,976 1,309 2,621 6.2
Commercial and Industrial 47,111 150 1,148 9.2
Real estate 59,510 91 611 3.8
Loans to Individuals 27,557 121 906 12.6
Leases 5,011 12 - 52 - 3.8
U.s. Treasury and Agency Securities2 12,241 42 - 266 - 7.8
Other Securities2 7,757 - 27 - 406 - 18.4
Total Deposits 189,072 3,955 - 1,925 - 3.7
Demand Deposits 45,744 2,838 - 3,493 - 26.3
Demand Deposits Adjusted3 29,888 1,102 - 1,443 - 17.1
OtherTransaction Balances4 13,033 976 258 7.5
Total Non~Transaction Balances6 130,295 140 1,310 3.7
MoneyMarket Deposit
Accounts-Total 40,287 - 272 690 6.4
Time Deposits in Amounts of
$100,000 ormore 37,913 - 120 - 252 - 2.4
Other Liabilities for Borrowed MoneyS 17,114 -1,521 - 5,893 - 95.1
Two WeekAverages
of Daily Figures
Reserve Position, All Reporting Banks
Excess Reserves (+)/Deficiency(-)
Borrowings
Netfree reserves (+)/Net borrowed(-)
Period ended
3/26/84
188
44
144
Period ended
3/12/84
189
49
139
1 Includes loss reserves, unearned income, excludes interbank loans
2 Excludes trading account securities
3 Excludes U.s. government and depository institution deposits and cash items
4 ATS, NOW, Super NOWand savings accounts with telephone transfers
S Includes borrowingvia FRB, TI&L notes, Fed Funds, RPs and othersources
6 Includes items notshown separately
Editorialcommentsmaybeaddressedtotheeditor(GregoryTong) ortotheauthor....Freecopiesof
Federal Reserve publicationscan beobtainedfrom the Public Information Section, Federal Reserve
BankofSan Francisco, P.0. Box 7702,San Francisco94120. Phone (415) 974·2246.

Which trade balance?

http://www.frbsf.org/publications/economics/letter/1984/el84-16.pdf

Which trade balance?

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics