Term Paper: U.S. Balance of Payments

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[. . .] Line 7 showed that passenger fares fell from 20,745 to 17,734. Line 8 showed that all other transportation fell from 30,185 to 28,292. Line 9 showed that royalties and license fees increased from 38,030 to 38,875. Line 10, other private services showed that the numbers increased from 107,568 to 112,892.

Line 11, which covers U.S. Government miscellaneous services, showed these numbers falling from 862 to 857. Line 12, income receipts showed that the numbers dropped from 352,866 to 293,808. Line 13, income receipts on U.S.-owned assets abroad, fell from 350,525 to 291,342.

Line 14, direct investment, dropped from 149,240 to 132,651. Line 15's numbers, which indicate other private receipts, fell from 197,440 in 2000 to 155,175 in 2001. Line 16 showed the U.S. government receipts fell from 3,845 to 3,516. Line 17, compensation of employees, showed a decrease from 2,341 to 2,466.

Comparison of U.S. Balance of Payments Current Account Data Line 18-38

Line

18 Income of Goods, Services and Income

19 Imports of Good and Services

20 Goods, Balance of Payments

21 Services

22 Direct Defense Expenditures

23 Travel

24 Passenger Fares

25 Other Transportation

26 Royalties and License

27 Other Private Services

28 U.S. Govt. Misc.

29 Income Payments

30 Income Payments on Foreign-Owned Assets in the U.S.

31 Direct Investment

32 Other Private Payments

33 U.S. Govt. Payments 34 Compensation of Employees

35 Unilateral current transfers

36 U.S. Govt. Grants 37. U.S. Government Pensions and Other Transfers

38. Private Remittances

When exports surpass the imports, the money supply increases and there is a surplus in the balance of payments. The money supply decreases in a deficit.

When exports surpass imports, the economy "earns" money because the bank's reserves are increased.

Compared to 2000, the trade deficit in 2001 was up by 25%, the result of a bigger increase in imports compared to exports.

Net services and income account estimated at $34.63 million, was down by 15.10% in 2001 after being up by 14.4% over the corresponding 2000 period (Mealey, 2002). Net transfers, standing at $50.43 million, increased by 38.2%, compared to the previous quarter and by 3.9% compared to 2000.

Compared to 2000, the current account deficit widened sharply by $17.29 million. Increases in net services and income account and net transfers between the two quarters were not substantial enough to offset the increase in the trade deficit leading to the widening of the deficit in the current account over this period.

As the price level falls, real wealth rises, interest rates fall, and the exchange rate depreciates (Oxford, 2002). These effects encourage spending on consumption, investment, and net exports. Increased spending on these elements of output means a larger quantity of goods and services demanded. This also stimulates growth in the economy causing stock prices to rise.

Comparison of U.S. Balance of Payments Data Capital Account

Line

39 Capital Account Transactions

40 U.S.-owned Assets abroad

41 U.S. Official Reserve Assets

42 Gold

43 Special Drawing Rights

44 Reserve Position in the International Monetary

45 Foreign Currencies

46 U.S. Govt. Assets 47 U.S. Credits and other Long-term Assets

48 Repayments on U.S. Credits and Long-term Assets

49 U.S. foreign currency holdings and U.S. short-term assets

50 U.S. private assets

51 Direct investment

52 Foreign securities

53 U.S. claims on unaffiliated foreigners reported by U.S. nonbanking

54 U.S. claims reported by U.S. banks

55 Foreign-owned assets in the United States

56 Foreign official assets in the United States

57 U.S. Govt. Securities 58 U.S. Treasury securities

60 Other U.S. Govt. Liabilities 61 U.S. liabilities reported by U.S. banks, not included elsewhere

62 Other Foreign Assets

63 Other foreign assets in the United States

64 Direct Investment

65 U.S. Treasury Securities

66 U.S. securities other than U.S. Treasury securities

67 U.S. Currency

68 U.S. liabilities to unaffiliated foreigners reported by U.S. nonbanking

69 U.S. Liabilities reported by U.S. banks, not included elsewhere

70 Statistical discrepancy

71 Balance on Goods (lines 3 & 20)

72 Balance on Services (lines 4&21)

73 Balance on goods and services (lines 2 and 19)

74 Balance on income

75 Unilateral current transfers

76 Balance on current account

Source: U.S. Bureau of Economic Analysis

Analysis

During the year 2001, the U.S. deficit decreased to $346,269 million, second only to the record $375,739 million deficit in 2000, according to statistics from the U.S. Department of Commerce (see Appendix A).

U.S. imports decreased 6.3% in 2001 to $1,350,013 million while exports dropped 5.8% to $1,003,744 million, the department reported. Imports for the year decreased for the first time since 1991.

With net unilateral transfers of $50.5 billion, the deficit on the current account amounted to $417 billion. To cover this deficit, the United States required a capital inflow of the same amount. That means net borrowings or net sales of assets to foreigners of the same magnitude.

In the same period, the capital account registered an increase of $439 billion in U.S. assets located abroad and a $895 billion increase in foreign assets held in the U.S. giving us a surplus balance of $456 billion. The difference, of approximately $39 billion, was attributed to statistical discrepancy, leaving a zero balance in the balance of payment statement.

The Department of Commerce predicted that an economic rebound by the United States preceding recoveries by its trading partners would likely result in U.S. trade deficits increasing again in the next year.

The department says that the U.S. trade deficit dropped by a record amount in September 2001, reflecting huge payments of U.S. claims by foreign insurance companies and a weakening global economy brought about by the September 11 terrorist attacks.

The department said that U.S. imports of services dropped to $4,514 million in September from $18,013 million in August, reflecting not only the $11,000 million surge in insurance payments but also a sharp drop in travel spending.

Large drops in exports were reported in autos plus a wide range of capital goods, including telecommunications equipment, computer accessories, generators, industrial engines, aircraft and semiconductors.

Similarly, massive import drops were reported in autos and capital goods plus natural gas, crude oil and gem diamonds.

The statistics were also influenced by the fact that the U.S. economy entered a recession in 2001. Imbalances in the economy built up during the boom years, including a low propensity to save and an unprecedented current-account deficit. This was not fully corrected during the recession. Inflationary pressures have been kept in check by a mixture of structural and cyclical factors.

In addition, strong domestic demand growth until 2000 benefited the exports of most other countries, and the U.S. trade deficit reached a new record in 2000 (Preeg, 2001). The recession of 2001 had only a marginal impact on the trade deficit, mostly because the rest of the world had weakened along with the U.S.

Many economists predict the deficit will retreat further in 2002. However, this forecast depends on international economies gaining strength and helping to offset rising U.S. demand, as the American economy posts an expected rebound from its first.

Bibliography

U.S. Bureau of Economic Analysis, 2002.

Black, John. A Dictionary of Economics. Oxford University Press, 2002.

Preeg, Ernest. The Trade Deficit, the Dollar, and the U.S. National Interest. Hudson Institute, 2001.

United States Balance of payments: A Methodology. Bureau of Economic Analysis, U.S. Department of Commerce, 2002.

Federal Reserve Bulletin, April 2001.

Bureau of Economic Analysis: www.bea.com.

Frey, Utay.… [END OF PREVIEW]

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