Understanding the Balance of Payments Accounts

The Balance of Payments Accounts summarize all international transactions between the US and the rest of the world. One of the most informative ways to learn about a country's balance of payments statistics is to take a careful look at them for a particular year. We shall do that here for the US balance of payments statistics for 2003.

Current Account

Line 1, $1.314 trillion, shows the value of all US exports of goods, services and income. This value is equal to the sum of lines 3, 4and 12.

Line 3, $713 billion, shows exports of merchandise goods. This includes any physical items that leave the country.

Line 4, $307 billion, shows exports of services to foreigners. This category includes travel services, passenger fares, royalties, license fees, insurance legal services and other private services.

Line 12, $294 billion, shows income receipts on US assets abroad. This represents profits and interest earned by US residents on investments in other countries. In one sense these are payments for services rendered where the services include entrepreneurial services in the case of foreign operated factories, or money services in the case of interest and dividend payments on foreign securities. This line is included in a measure of gross national product (GNP) since this income is accruing to US factors of production. However, the line is excluded from a measure of gross domestic product (GDP) since production did not take place within the borders of the country. Income receipts are divided into four sub-categories; direct investment receipts, other private receipts, US government receipts and compensation of employees.

Line 14, $187 billion, shows direct investment receipts. This represents profit earned by US companies on foreign direct investment, where FDI is defined as a greater than 10% ownership share in a foreign company. Note that this is not new investments, but rather, is the profit and dividends earned on previous investments.

Line 15, $99 billion, shows other private receipts. This category includes interest and profit earned by individuals, businesses, investment companies, mutual funds, pension plans, etc. In effect all private investment income that accrues on investments worth less than 10% of a company would be included here.

Line 16, $4.7 billion, shows US government income receipts. This refers to interest and other income earned by government investments abroad. Notice that this item is very small compared to the other two income categories.

Line 18, $1.778 trillion, records imports of goods services and income. This value is equal to the sum of lines 20, 21 and 29.

Line 20, $1.260 trillion, shows imports of merchandise goods. Notice that goods imports makes up about two-thirds of total imports.

Line 21, $256 billion, shows imports of services such as travel services, passenger fares, insurance etc.

Line 29, $261 billion, shows income payments on foreign assets in the US . This corresponds to income earned by foreigners who operate companies in the US or income earned on other US based assets held by foreigners. This entry is further divided into four components; direct investment payments, other private payments, US government payments and compensation of employees.

Line 31, $68 billion, records direct investment payments to foreigners in the US . This represents profit earned on foreign direct investment by foreign residents' companies, where FDI is defined as a greater than 10% ownership share in a US company. Note that this is not new investments, but rather, is the profit and dividends earned on previous investments.

Line 32, $111 billion, reports other private payments. This category includes interest and profit earned by individuals, businesses, investment companies, mutual funds, pension plans, etc. In effect all private investment income that accrues on investments worth less than 10% of a company would be included here.

Line 33, $72 billion, records payments made by the US government to foreigners. This item represents mostly interest payments on US treasury bills owned by foreigners.

Line 35, $67 billion, records net unilateral transfers. These transfers refer to government’s grants to foreign nations, government pension payments, and private remittances to family and friends abroad. A debit entry here means that the net transfers are outbound. That is, more transfers are made from the US to individuals abroad than are made in the reverse direction.

Capital Account

Line 39, $3 billion represents net capital account transactions. The Capital Account was redefined in 1999 to conform more closely to international standards.  It refers specifically to unilateral transfers of assets between countries, such as debt forgiveness or migrant worker transfer (the assets that migrant workers take when they enter/leave the country).  This is typically a very small number.

Financial Account

Line 40, $283 billion, shows the value of purchases of foreign assets by US residents; hence it is referred to as a capital outflow. The line is the sum of US official reserve assets (line 41), US government assets (line 46), and US private assets (line 50).

Line 41, $1.523 billion, represents net US official reserve transactions. Any purchases or sales of foreign currency in a foreign exchange intervention by the central bank would be recorded here. Since the item is a credit entry, it means that the US central bank made net sales of foreign assets (currencies) in 2003.

It is worth noting that this line is more important for a country maintaining a fixed exchange rate. To maintain a credible fixed exchange rate, central banks must periodically participate in the foreign exchange market. This line measures the extent of that participation and is sometimes referred to as the "balance of payments" in a fixed exchange rate system.

Line 46, $537 million, represents net sales of assets by the US government, though not by the Federal Reserve.

Line 50, $285 billion, shows private purchases of foreign assets by US residents. It is the primary component of total US assets abroad. The item is composed of direct investment (line 51), Foreign securities (line 52), US claims reported by US non-banks (line 53), and US claims reported by US banks (line 54).

Line 51, $173 billion, shows direct investment by US residents abroad. It would include purchases of factories, stocks etc. by US businesses and affiliates in foreign countries as long as there is a controlling interest in excess of 10% voting share.

Line 52, $72 billion, shows purchases of foreign stocks and bonds by US individuals and businesses when there is no controlling interest in the foreign company. Most purchases by US mutual funds, pension funds and insurance companies would be classified here.

Line 53, $28 billion, shows US resident purchases of foreign assets reported by non-banks.

Line 54, $10 billion, reports US resident purchases of foreign assets reported by US banks. This may include items like foreign currency denominated demand deposits held by US businesses and individuals in US banks.

Line 55, $829 billion, shows the sum total of foreign assets in the US . This item refers to all purchases of US assets by foreign residents; thus, it is listed as a capital inflow. This line is composed of the sum of foreign official assets in the US (line 56), and other foreign assets in the US (line 63).

Line 56, $248 billion, refers to purchases of US assets by foreign governments or foreign central banks.

Line 63, $580 billion, refers to all other foreign assets purchases of US assets and is the main component of capital inflows. It is composed of direct investment (line 64), US treasury securities (line 65), US currency (line 67), US securities other than T-bills (line 66), US liabilities reported by US non-banks (line 68), and US liabilities reported by US banks (line 69).

Line 64, $39 billion, refers to purchases of US factories and stocks when there is a greater than 10% ownership share.

Line 65, $113 billion, shows total purchases of US treasury bills by foreigners. This corresponds to foreign loans to the US government.

Line 67, $16 billion, represents US currency that has been transported abroad and is held by foreigners. Because of the expectation that the US dollar will remain stable in value, it is often held by residents in inflationary countries to prevent the deterioration of purchasing power. It is estimated that over $200 billion of US currency circulates abroad and is used in exchange for foreign goods and services. This value represents only the additional amount that flowed abroad in 2003.

Line 66, $250 billion, shows non-US Treasury bill and non-direct investment purchases of stocks and bonds by foreigners.

Line 68, $84 billion, shows deposits and purchases of US assets by foreigners reported by US non-banks.

Line 69, $75 billion, reports deposits and purchases of US assets by foreigners reported by US banks. Thus is a foreign resident opens a checking account in a US bank, denominated in US dollars, that value would be recorded here.

Line 70, $12 billion, represents the statistical discrepancy. It is the sum of all the above items with the sign reversed. It is included to satisfy the accounting requirement that all debit entries be balanced by credit entries of equal value. Thus, when the statistical discrepancy is included, the balance on the complete balance of payments is zero.