| | | | | | | Upon completion of this chapter you should | | | | |  | | | | | view a country's balance of payments as a measure of disequilibrium in its international sector; | | | | | | | | | | know how the balance of payments, the balance of trade, the current account, and the capital account are interrelated; and | | | | | | | | | | understand a main reason for persistent trade deficits. | | | | | |
| | | | | 15.1
The Balance of Payments | | | | | | | | | An economy has two basic kinds of economic interactions with the rest of the world: buying and selling goods and services, and buying and selling assets, mainly financial assets. In the former category are imports and exports of physical goods, such as lumber and automobiles; imports and exports of services, such as transportation and tourism; and payments for capital services, such as interest and dividend payments. The main components of the latter category are purchases or sales of bonds and common stock, and direct investment through purchase of businesses or real estate. | | | | | | | | | Each of these activities gives rise to a situation in which either foreigners wish to obtain our dollars, or we wish to obtain foreign currency. The former is viewed as a demand for our dollars on the foreign exchange market, and the latter is viewed as a supply of our dollars on this market (because we bring our dollars to this market to get foreign currency). | | | | | | | | | For example, exports of either goods or services creates a demand for our dollars as those buying the exports seek dollars to pay for them (or, if they pay with foreign currency, as we seek to convert that currency into our dollars). Imports, on the other hand, cause us to supply dollars to the foreign exchange market as we seek foreign currency to pay for these imports. If foreigners wish to buy our bonds, a demand for our dollar is created. If we wish to buy foreign bonds, we supply dollars to the foreign exchange market to obtain the foreign currency to pay for the bonds. | | | | | | | | | The balance of payments is the difference between the sum of all the demands for and all the supplies of our dollar on the foreign exchange market. Any purchases or sales of dollars on this market by a government, typically undertaken by its central bank, are not counted because they are thought to be artificial, rather than reflecting the true forces of supply and demand. If the total number of dollars supplied is equal to the total number of dollars demanded, the result is a zero balance of payments. In this case, the international sector of the economy is said to be in balance or in "equilibrium," and no economic forces for change arise from the international sector. | | | | |
