Q3. What do the plus signs and negat... [FREE SOLUTION]

Chapter 21: Q3. (page 450)

What do the plus signs and negative signs signify in the U.S. balance-of-payments statement? Which of the following items appear in the current account and which appear in the capital and financial account: U.S. purchases of assets abroad, U.S. services imports, foreign purchases of assets in the United States, U.S. goods exports, U.S. net investment income? Why must the current account and the capital and financial account sum to zero?

Short Answer

Expert verified

A plus sign signifies credit, and a negative sign indicates debit from the U.S. balance of payments statement.

Imports of services, export of goods, and net investment income belong to the current account, while purchase or sell of assets is the parts of the capital and financial account of the U.S. economy.

Current account and capital and financial account balance each other so that the net BOP statement is zero.

Step by step solution

Sign conventions in the balance of payments

Balance of payments is defined as the summation of all the financial tractions taking place between two countries.

The negative sign signifies the flow of money out of the U.S. economy, and the positive sign indicates the flow of funds into the United States. For example, the U.S. exports of goods & services and the U.S. imports of goods & services will be denoted by positive and negative signs, respectively, in the current account of the U.S. balance of payments.

When there is an export, goods or services flow out of the U.S. economy, and money is credited into the U.S. economy. For imports, cash is debited from the United States economy.

Differentiating the items between current and capital & financial account

Current Account	Capital and Financial account
U.S. services imports U.S. goods exports U.S. net investment income	U.S. purchases of assets abroad Foreign purchases of assets in the United States

Zero BOP

Since any deficit or surplus in the current account automatically creates an offsetting entry in the capital and financial account, the current account balance and the capital and financial account balance must always sum to zero.