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1、101The Balance of Payments The first three chapters of this book provide insights into the nature of foreign exchange markets and foreign exchange risks. To understand these concepts more deeply, you need to understand the economic forces that cause exchange rates to fluctuate. Exchange rates respon
2、d to demand and supply to trade currencies. These demands and supplies arise from international trade flows and international capital flows. Plenty of useful information about these international flows is provided by the balance of payments, which records the payments between residents of one countr
3、y and the rest of the world over a given time period. As such, it helps shed a great deal of light on the supply and demand for various currencies, the possible evolution of their exchange rates, and the global financial marketplace in general. Balance of payments statistics are discussed daily by p
4、oliticians, the news media, and currency analysts at corporations, commercial banks, investment banks, and mutual funds. Currency traders eagerly await the release of new balance of payments statistics because they know exchange rates will move with the new information. We will see how the bal-ances
5、 on various subaccounts are linked to domestic and international saving and invest-ment decisions and ultimately how they may determine a countrys financial and economic health. For example, multinational firms should recognize that persistent current account deficits in developing countries can sig
6、nal that currency devaluations are likely to occur there, with potentially dire economic ramifications. In developed countries, persistent cur-rent account deficits can lead legislators to unleash protectionist policies, such as tariffs and embargoes on imported goods and services. Every company in
7、the world doing busi-ness with China keenly follows the effect that the U.S. trade deficit with China is having on the two countries trade policies. 4.1 THE BALANCE OF PAYMENTS:CONCEPTS AND TERMINOLOGYA countrys balance of payments (BOP) records the value of the transactions between its residents, b
8、usinesses, and government with the rest of the world for a specific period of time, such as a month, a quarter, or a year. Hence, the balance of payments summarizes the inter-national flows of goods and services and changes in the ownership of assets across countries. Chapter4102 Part I Introduction
9、 to Foreign Exchange Markets and RisksMajor Accounts of the Balance of Payments There are two major BOP accounts: the current account and the capital account. In recent years, most countries have renamed the capital account as the “financial account” in order to comply with the recommendations of th
10、e International Monetary Fund (IMF). Because the terminology capital account has a long tradition and continues to be used in the financial press, we continue to use it here. The current account records the following: Goods and services transactions ( imports , which are purchases of goods and servi
11、ces from foreign residents; and exports , which are sales of goods and services to foreign residents).Transactions associated with the income flows from the ownership of foreign assets (dividends and interest paid to domestic residents who own foreign assets as well as dividends and interest paid to
12、 foreign residents who own domestic assets). Unilateral transfers of money between countries (foreign aid, gifts, and grants given by the residents or governments of one country to those of another). The capital account records the purchases and sales of foreign assets by domestic resi-dents as well
13、 as the purchases and sales of domestic assets by foreign residents. The defini-tion of an asset is all inclusive: It encompasses both financial assets (bank deposits and loans, corporate and government bonds, and equities) and real assets (factories, real estate, antiques, and so forth). One type o
14、f capital account transaction merits special attention: transactions involving the purchase or sale of official international reserve assets by a nations central bank. Interna-tional reserves are the assets of the central bank that are not denominated in the domestic cur-rency. Gold and assets denom
15、inated in foreign currency are the typical international reserves. Exhibit 4.1 surveys the various types of transactions and accounts of the BOP and splits the capital account into two parts: a regular capital account and an official settlements account , or official reserves account . The regular c
16、apital account records all transactions other than Exhibit 4.1 Summary of the Accounts of the Balance of Payments Debits (recorded with a H11546) Credits (recorded with a H11545)I. CURRENT ACCOUNT(A) TRADE BALANCE(Transactions in goods, services, and transfers)Imports to the United States Exports from the United States(B) INVESTMENT INCOME ACCOUNTPayment by the United States of dividends and interest to foreignersReceipt by the United States of dividends and interest from
