As noted at the beginning of this monograph, the balances shown by selected combinations of balance-of-payments accounts are of considerable interest to analysts and government officials. Four of these measures are shown on lines 28 to 31 of the table.
The first and simplest of these measures is the balance on merchandise trade, which is derived by computing the net excess of debits or credits in the merchandise accounts. In our hypothetical statement there is a net credit balance, or "surplus," of $4 million.
Similarly, by computing the net excess of debits or credits in the goods and services accounts, we obtain the balance on goods and services, which happens to be a credit (an excess of exports over imports) of $10 million. Such a credit balance indicates that the United States transferred more real resources (goods and services) to other countries than it received from them during the period covered by the statement, while a debit balance would indicate the reverse. The balance on goods and services is of interest not only as an approximation of such net transfers of real resources but also because it is defined in roughly the same way as the "net exports of goods and services" that comprise part of the nation's gross national product or expenditure; the main quantitative difference in definition is that interest payments by the U.S. government to foreign residents are not counted in tallying net exports of goods and services, on the rationale that government interest is not a payment for services used in the production process, while such interest payments are counted in striking the balance on goods and services.
The third measure, the balance on current account, is the net excess of debits or credits in the accounts for goods, services, and unilateral transfers, that is, the balance on all accounts other than the financial claims, or "capital," accounts. Because total debits must equal total credits in the balance of payments, the balance on the current accounts must equal the balance on the remaining, or capital, accounts. Thus, the current-account balance is an approximation of the change in the net claims of U.S. residents on the rest of the world; it is a major component of the change in the country's net international investment position, or "net worth," vis-a.-vis the rest of the world. 1
As a rule, it is much more difficult to interpret the fourth measure, "Transactions in U.S. official reserve assets and in foreign official assets in the United States." From a simple accounting perspective, this balance measures the difference between the change in U.S. official reserves and in foreign official claims on the United States. A debit balance, such as that shown in the statement, indicates that U.S. official reserve assets have risen more (or fallen less) than foreign official claims on this country, while a credit balance would indicate the reverse.
In some circumstances, however, this fourth measure summarizes considerably more information. For example, suppose that there had been no allocation of SDRs (no transaction 9), so that the balance on this fourth measure was a credit of $25 million rather than the debit of $175 million that is shown. From the description of transactions 8 and 10, it is clear that this $25 million credit arose from central bank operations in support of the foreign exchange value of the dollar. The amount of this credit (support) along with any observed decline in the foreign-exchange value of the dollar would then provide a joint indication of the weakness of the dollar in the foreign-exchange markets during the period in question.
Such interpretations require knowledge of the details of transactions like 8 and 10, and the details are often difficult to come by. For example, foreign officials, such as those in some oil-exporting countries, sometimes acquire dollar balances for investment or reserve purposes (rather than as a result of supporting the dollar as in transaction 8). In such cases dollar purchases by foreign central banks testify to the desirability or strength of the dollar in the foreign-exchange markets, rather than to its weakness. Therefore, it is safest to interpret this fourth measure of balance from the simple accounting perspective outlined above.
This measure's first component, "Transactions in U.S. official reserve assets," is worthy of special attention in itself. To illustrate, when foreign central banks acquired $10 million in SDRs in transaction 10, they gave to the U.S. authorities ( directly or indirectly) $10million in U.S. commercial bank balances in return. The Federal Reserve authorities would collect this $10 million by deducting it from the reserve balances member banks hold with the Federal Reserve System, with the result that U.S. commercial banks would have less money to lend.I5 If the authorities took no measure to restore such sums to the commercial banks, the reduced lending capacity of the commercial banking system would tend to raise U.S. interest rates and attract more foreign investment into dollar-denominated assets, thereby bolstering the foreign-exchange price of the dollar.
In fact, of course, the Federal Reserve authorities commonly do act to offset any changes in commercial bank reserves stemming from international transactions unless such changes are in accord with Federal Reserve policy. Moreover, the volume of U.S. official reserve assets can be altered by transactions that lack even an initial impact on commercial bank reserves, such as allocations of SDRs. Therefore, "Transactions in U.S. official reserve assets" also must be interpreted with circumspection.
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