CONCEPTUAL QUESTIONS
2.2 BALANCE-OF-PAYMENTS STATISTICS
Cross-Border Integration of the World’s Financial Markets
Integration is proceeding at an even faster pace in financial markets as advances in electronic communication and data processing reduce physical and institutional barriers to the free flow of capital. Developments in information technology (IT) and telecommunications have been especially important in hastening the integration of international financial markets. Trading in currency derivatives continues to enjoy explosive growth. Although some of this growth is a consequence of the growth in import and export trade, a considerable portion is due to the introduction of new financial markets and instruments that facilitate trade and the transfer of ownership, risks, and returns.
IT assists financial market integration.
Along with the reduction of barriers in the world’s goods markets, the demise of capital flow barriers in international financial markets has had several consequences.
■ An increase in cross-border financing as multinational corporations (MNCs) raise capital in whichever market and in whatever currency offers the most attractive rates (see Chapter 14)
■ Increasingly interdependent national financial markets, including an increasing number of cooperative linkages among securities exchanges (see Chapters 5 – 7 and 18)
■ An increasing number of cross-border partnerships, including many interna- tional mergers, acquisitions, and joint ventures (see Chapter 17)
The global financial crisis of 2008 provides a striking example of the interdependence of the world’s financial markets and reminds us that we all live on the same small planet.
■ Multilateral Investment Guarantee Agency (MIGA), which promotes investment in developing countries by offering political risk insurance
■ International Centre for the Settlement of Investment Disputes (ICSID)
The IMF and the World Bank were created at Bretton Woods in 1944.
Bretton Woods also created the IMF to provide assistance to countries trying to defend their currencies against temporary trade or supply/demand imbalances.
The IMF is a huge supranational organization with an annual budget of close to $1 billion. The IMF compiles and publishes a monthly summary of(BoP) statisticsthat track each country’s cross-border flow of goods, services, and capital.
BoP statistics track cross-border trade.
Figure 2.3 presents BoP accounts for the United States on an annual basis. BoP statistics show a country’s inflows (+) and outflows (−) of goods, services, and capital. The accounts of most interest are: (1) the trade balance, (2) the current account, and (3) the financial account.
Thetrade balancemeasures whether a country is a net importer or exporter of goods. Exports are a positive number while imports are negative, so atrade surplus
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Goods: Exports f.o.b. 772
−1224−1146−1167−1261−1473−1677−1860−1985−2141−1577
−504
−369
−375 −496
−499
−467
−253
−125
−378
−269
−393
−196
−144
−533
−346
−470
−137
−333
−393
−644
−1937
−832
−397
−699
−645
−547
−122
−669
−351
−394
−820
−366
−702
−730
−603
−116
−718
−414
−391
−671
−836
−342
−765
−773
−84
−4
−249
−322
−475
−857
−629
−783
−315
−717
−463
−705
−792
−4
−9
−86
−665
−296
−618
−349
−587
−81
−668
−2
−252
−251 −224
−193
−352
−547
−257
−427 −484
−210 −240
−436 −495
−358
−269 −257 −264
−447 −449
−71
−56
−503 −520
−3
−452
−219
−379
−331
−357 −344
−393
−49
−53
−410
−178 −128 −124 −141
−180
−26
−6 −8
−38
−109
−134
−278
−150
719 683 713 808 895 1024 1164 1309 1073 1293 Goods: Imports f.o.b.
Trade Balance
Services: Credit 292 279 289 309 344 381 413 484 530 498 541
Services: Debit
Balance on Goods & Services
Income: Credit 353 284 245 310 380 475 622 830 797 588 662
Income: Debit
Balance on Goods, Services, & Income Current transfers: Net
Current Account
Capital account: Net 1 1 1 0 6 0 0
Direct Investment Abroad
Direct Invest from Abroad 308 131 30 67 107 110 184 271 328 135 194
Portfolio Investment Assets 286
Portfolio Invest Liabilities 552 482 388 430 601 704 827 1157 520 367 757
Other Investment Assets 226 574
Other Investment Liabilities 156 140 213 392 732 399 754 680 293
Financial Account 409 382 474 561 585 785 719 638 583 268 237
Net Errors and Omissions 0 11 29 85 10 141 80 85 163 235
FIGURE 2.3 U.S. Balance of Payments (billions of U.S. dollars)
Source:IMF (www.imf.org). Figures may not add due to rounding. The termf.o.b.stands for ‘‘free-on-board’’ and indicates that the values of imports and exports are measured at the border of the exporting country.
(a balance greater than zero) indicates that residents are exporting more than they are importing. Conversely, a trade deficit (a trade balance less than zero) means that residents are importing more goods than they are exporting. The trade balance is important to fiscal and monetary authorities because higher exports mean higher employment in the domestic economy. During 2010, U.S. imports and exports of goods were $1,937 billion and $1,293 billion, respectively, for a trade deficit of
$644 billion. The United States has run a trade deficit every year since 1978.
Figure 2.4 provides estimates of 2010 trade balances for a cross-section of countries. Gross domestic product (GDP) and GDP per capita also are shown for reference. Some countries, such as the United States (−$633 billion) and the United Kingdom (−$141 billion) were net importers during 2010. Other countries were net exporters, including Germany (+$217 billion), China (+$199 billion), Russia (+$139 billion), Saudi Arabia (+$136 billion), and Japan (+$128 billion).
Thecurrent accountis a broader measure of import-export activity that includes the trade balance on goods, as well as services, royalties, patent payments, travel and tourism, employee compensation, individual investment income, gifts, and grants.
The U.S. current account deficit was $470 billion in 2010 according to the U.S.
Bureau of Economic Analysis (www.bea.gov). The United States has had a current account deficit every year since 1981.
Thefinancial accountcovers cross-border transactions associated with changes in ownership of financial assets and liabilities. Within these accounts, the ‘‘direct investment’’ accounts include inflows and outflows of direct investment capital such as equity capital, reinvested earnings, and intercompany transactions between affiliated parties. ‘‘Portfolio investment’’ includes cross-border transactions asso- ciated with long-term debt and equity securities, money market instruments, and derivative instruments. ‘‘Other investment’’ reflects other financial transactions, including foreign currency deposits, loans, and trade credits. The financial account is the sum of these transactions. The United States has run a financial account surplus for many years, with more money being attracted to the United States than invested abroad.
Trade
GDP per capita
GDP per capita Trade
Exports Imports balance GDP Exports Imports balance GDP European Union 1.952 1.690 0.262
−0.633 −0.049
−0.007
−0.012
−0.126
−0.141
−0.069
−0.001
−0.003
−0.056
14.910 29,645 Indonesia 0.146 0.111 0.035 1.033 4,206 United States 1.270 1.903 14.720 46,994 Turkey 0.117 0.166 0.958 12,163 China 1.506 1.307 0.199 9.872 7,385 Australia 0.211 0.200 0.010 0.890 40,870 Japan 0.765 0.637 0.128 4.338 34,299 Iran 0.079 0.059 0.020 0.864 11,086
India 0.201 0.327 4.046 3,402 Taiwan 0.275 0.251 0.023 0.824 35,697
Germany 1.337 1.120 0.217 2.960 36,332 Poland 0.161 0.167 0.725 18,865 Russia 0.377 0.237 0.139 2.229 16,066 Netherlands 0.451 0.408 0.043 0.680 40,387 Brazil 0.200 0.188 0.012 2.194 10,785 Saudi Arabia 0.235 0.099 0.136 0.623 23,822 United Kingdom 0.406 0.547 2.189 34,913 Argentina 0.068 0.053 0.015 0.596 14,269 France 0.509 0.578 2.160 33,072 Thailand 0.191 0.157 0.034 0.580 8,698 Italy 0.458 0.460 1.782 29,205 South Africa 0.077 0.077 0.000 0.528 10,764
Mexico 0.303 0.306 1.560 13,717 Egypt 0.025 0.000 0.025 0.501 6,103
South Korea 0.466 0.418 0.048 1.467 30,089 Pakistan 0.020 0.033 0.451 2,408 Spain 0.268 0.325 1.376 29,430 Colombia 1.506 1.307 0.199 0.432 9,657 Canada 0.407 0.406 0.000 1.335 39,229 Malaysia 0.210 0.174 0.036 0.417 14,505
FIGURE 2.4 Trade Balances during 2010 by Country (trillions of U.S. dollars)
Source:CIA Factbook (www.cia.gov). The figure lists trade balances in the 29 countries with the largest 2010 GDP, with the EU added for comparison. All accounts except GDP per capita are in trillions of U.S. dollars.
As the name suggests, the BoP is a double-entry system that is intended to record both sides of every cross-border transaction. Because only one side of a transaction typically is reported to the local monetary authorities, the BoP includes a ‘‘net errors and omissions’’ account to ensure that inflows equal outflows. This account is an attempt to infer cross-border activity from imbalances elsewhere in the BoP. Illegal drug trafficking, for example, is unlikely to be reported by the traffickers. Purchases and sales of short-term financial claims also are often unreported and can account for a sizable proportion of the ‘‘net errors and omissions’’ account. Errors and omissions were $235 billion in the United States during 2010, or about 1.6 percent of the $14.72 trillion in U.S. GDP.