Imports. If exports exceed imports, then a trade surplus or “favorable balance of trade” is being

realized. If imports exceed exports, then a trade deficit or “unfavorable balance of trade” is occurring. In

the given year, we note in item 3 that the United States incurred a trade deficit of $159 billion.

Balance on goods and services. Item 4 tells us that the United States not only exports autos and

computers, but also sells transportation services, insurance, and tourist and brokerage services to

residents of foreign countries. These service sales or “exports” amounted to $70 billion in the given

year. Item 5 merely indicates that Americans buy or “import” similar services from foreigners.

These service imports amounted to $72 billion.

The balance on goods and services, shown in Table T. 14.1 as item 6, refers to the difference between

the exports of goods and services (items 1 and 4) and the imports of goods and services (items 2 and 5).

American exports of goods and services fell short of the imports of goods and services by $ 161 billion.

Balance on current account. Item 7 reflects the fact that historically the United States has been

a net international lender. Over time it has invested more abroad than foreigners have invested in

the United States. Thus net investment income represents the excess of interest and dividend payments

which foreigners have paid the USA for the services of American exported capital over what

they paid in interest and dividends for their capital invested in the United States. Table 9 tells us

that, on balance, the net investment income earned the USA $14 billion worth of foreign currencies

for “exporting” the services of American money capital invested abroad.

Item 8 reflects net transfers, both public and private, from the United States to the rest of the

world. Included here is American foreign aid, pensions paid to Americans living abroad, and remittances

of immigrants to relatives abroad. Note that these $14 billion of transfers are “outpayments”

and exhaust available supplies of foreign exchange..

By taking all the transactions in the current account into consideration we obtain the balance on

current account shown by item 9 in Table T.14.1. In the given year, the United States realized a

current account deficit of $161 billion. This means that the American current account import

transactions (items 2, 5, and 8) created a demand for a larger quantity of foreign currencies than

American export transactions (items 1, 4, and 7) supplied.

Capital account. The capital account reflects capital flows involving the purchase or sale of real

and financial assets which occurred in the given year. For example, Honda or Nissan might acquire

an automobile assembly plant in the United States. Or, alternatively, the investments may be of a

financial nature, for example, a rich Arabian oil sheik might purchase GM stock or Treasury bonds.

In either event such transactions generate supplies of foreign currencies for the United States.

They are therefore credit or inpayment items and so are designated with a plus sign. The United

States is exporting stocks and bonds and thereby earning foreign exchange. Item 10 in Table 9

indicates that such transactions amounted to $180 billion.

Conversely, Americans invest abroad. Zenith might purchase a plant in Hong Kong or Singapore

to assemble pocket radios or video recorders. Or a well-to-do American might buy stock in an Italian

shoe factory. Or an American bank might finance the construction of a meat processing plant in

Argentina. These transactions have a common feature; they all use up or exhaust supplies of foreign

currencies. Therefore a minus sign is attached to remind us that these are debit or outpayment transactions.

Item 11 in Table T.14.1 reveals that $74 billion of such transactions occurred. We also see

that, when items 7 and 8 are combined, the balance on the capital account was a plus $ 106 billion. In

other words, the United States enjoyed a capital account surplus of $106 billion.

The current and capital accounts are interrelated; they are essentially reflections of one another.

The current account deficit tells us that American exports of goods and services were not sufficient to

pay for the imports of goods and services. How did the USA finance the difference? The answer is

195

that the United States must either borrow from abroad or give up ownership of some of its assets to

foreigners as reflected in the capital account. A simple analogy is useful in explaining this notion.

American capital account surplus of $106 billion (item 12) indicates that in the given year the

United States “sold off’ real assets (buildings, farmland) and received loans from the rest of the

world in that amount to help finance American current account deficit of $161 billion. A nation’s

current account deficit will be financed essentially by a net capital inflow in its capital account.

Conversely, a nation’s current account surplus would be accompanied by a net capital outflow in its

capital account. In this latter instance the excess earnings from its current account surplus will be

used to purchase the real assets of, and to make loans to, other nations of the world.

Official reserves. The central banks of the various nations hold quantities of foreign currencies

called official reserves which are added to or drawn upon to settle any net differences in current and

capital account balances. For example, in the given year the surplus in American capital account

was considerably less than the deficit in American current account, so the USA had a $55 billion

net deficit on the combined accounts (item 13). Stated differently, the United States earned less

foreign monies in all of its international trade and financial transactions than it used.

The important point for immediate purposes is that the three components of the balance of payments

statement — the current account, the capital account, and the official reserves account — must sum to

zero. Every unit of foreign exchange used (as reflected in “minus” outpayment or debit transactions)