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I would like to measure US corporations' investments in property, plants, and equipment abroad versus their spending on labor abroad. However, I'm unsure of the categorizations on the International Transactions report.

BEA report for reference:

Suppose I'm American and I want to build a factory in Mexico. I have $1 million dollars.

Scenario A - I convert \$1 million to pesos and put the pesos in a Mexican bank. I use the pesos to purchase a factory and pay my workers every two weeks. Does this $1 million show up entirely as an outflow in reserve assets (page 9 line 75)?

Scenario B - I don't convert my money. I build the Mexico factory and pay my workers entirely in USD. Does the factory show up entirely in outflow of direct investment assets (page 9 line 62)? Does my periodic worker comp show up entirely in primary income payments compensation of employees (page 9 line 57)?

Now suppose at the end of the year, the workers convert their dollars to pesos. Does this conversion show up in currency and deposits (page 9 line 94)?

Edit: It seems that construction of the factory itself is can be considered as a import of construction services for America according to the IMF's treatment for compensation of employees.

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I think it does not really work that way

Going through your references:

  • (Table 1 line 75) Reserve Assets: These are foreign assets held by the Federal Reserve or US Treasury for intervening in currency markets. Since the US does not intervene, the small numbers are largely miscellaneous transactions related to IMF Special Drawing Rights

  • (Table 1 line 62) Direct Investment Assets: This is the closest as to what is going on. Amounts sent out to buy or build the factory are counted here, as are later investments from non-repatriated income

  • (Table 1 line 57) Imports and income payments - compensation of employees: this is payments for short term workers coming into the country and then going home, such as seasonal agricultural workers. If you had built your factory by sending short-term construction workers abroad to build it then their income might have counted as (Table 1 line 29) Exports and income receipts - compensation of employees

  • (Table 1 line 94) Other investment liabilities - currency and deposits: assuming your workers abroad are resident there and you pay them in US dollars (why?), then this increases this line, but if they then change this into their currency by transacting with you in the US it reduces it back again

I would have thought that a more natural set of transactions would be something like:

  • You start with some US dollars for the investment which you change into Mexican pesos (increasing line 71 for you and either increasing line 94 or decreasing line 71 for somebody else depending on whether they are foreign)
  • You use the pesos to buy some land in Mexico, buy construction supplies and hire construction workers (reducing line 71 but increasing line 62) so you end up with a factory in Mexico
  • Now you have a factory in Mexico, your factory pays in pesos for workers resident and working in Mexico and for supplies, and receives revenues from sales. Your factory's net profit or loss appears as Direct Investment Income (line 25), which if you do not repatriate it then also goes into further Direct Investment in your Mexican factory (line 62)
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  • $\begingroup$ When you say increasing or reducing, are you strictly talking about magnitude or the sign as well? E.g., when you change USD to Pesos and you increase line 71, since line 71 is negative, I assume the increase means line 71 becomes more negative. So when US private investors acquire more foreign currency the line becomes more negative. Then line 94 would become more positive because Mexico has more US dollars (assuming foreign bank). Thanks Henry. I probably need to go read the IMF's balance of payments manual. $\endgroup$
    – Zhulu
    Aug 23, 2016 at 21:19
  • $\begingroup$ @Zhulu: the negative figures in Table 1 line 71 (also Table 8 lines 2 and 4) represent US residents using or selling their existing foreign currency and deposits in net terms, though 2016 Q1 is positive. When I said reducing, I meant less positive or more negative. $\endgroup$
    – Henry
    Aug 23, 2016 at 22:14

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