Balance of payments

From Academic Kids

The balance of payments is a measure of the payments that flow from one country to another. It is determined by a country's exports and imports of goods, services, and financial capital, as well financial transfers.



If more money flows in than out, one has a positive balance of payments; if more flows out than in, one has then a negative balance. The money flowing over the border is like other money paying for goods, commodities, real estate, services, securities.

A country's international transactions can be grouped into three categories:

(I) Current Account
  • Exports
  1. Merchandise (tangible goods)
  2. Services (invisible trade, eg. legal, consulting, royalties, patents etc.)
  3. Factor Income (interest, dividend or any other foreign investment income)
  • Imports
  1. Merchandise
  2. Services
  3. Factor income
  • Unilateral Transfers (one way "unrequitted" payments, eg.foreign aid, grants, gifts etc.)
(II) Capital Account
  1. Foreign Direct Investment (FDI)
  2. Portfolio Investment
    • Equity Securities
    • Debt Securities
  3. Other Investment (transactions in currency, bank deposits, trade credits etc.)
  4. Statistical discrepancies
(III) Foreign Reserves
  • Official Reserve account, includes gold, foreign exchanges, SDRs, reserves in IMF

  • current account: records net flow of money into a country resulting from trade in goods and services and transfer payments made from abroad. The current account itself comprises of 3 accounts : trade account, income account and transfers account. A trade deficit(surplus) arises when there is a deficit(surplus) in the Merchandise trade within the current account
  • capital account: records net flow of money from purchases and sales of assets such as stocks, bonds and land.

Money coming in (+), or leaving (−):

  • + Exports
  • − Imports
  • − Increase of owned assets abroad
  • + Increase of foreign-owned assets in the country

An account may show a surplus or a deficit. For example, a trade surplus implies that a country's exports are higher than its imports and hence there is a net flow of money into the country. A trade deficit, on the other hand, implies that the country's imports exceed its exports and hence there is a net flow of money out of the country.

For a country to have a zero balance of payments, a current account deficit must be balanced by a capital account surplus. The US have been running a negative current account for a long while, which is financed through a positive financial account. The only way to buy more than you sell is to borrow money.

A country will have a negative balance of payments (i.e., there is to be a net flow of money out of the country) if the net of the current account and the capital account is a deficit. Similarly, there will be a positive balance of payments (i.e., a net flow of money into a country) if the net of the current and the capital account results in a surplus.


Historically these flows simply were not carefully measured, and the flow proceeded in many commodities and currencies without restriction, clearing being a matter of judgement by individual banks and the governments that licensed them to operate. Mercantilism was a theory that took special notice of the balance in payments and sought simply to monopolize gold, in part to keep it out of the hands of potential military opponents (a large "war chest" being a prerequisite to start a war, whereupon much trade would be embargoed).

As mercantilism gave way to classical economics, these crude systems were later regulated in the 19th century by the gold standard which linked central banks by a convention to redeem "hard currency" in gold. After World War II this system was replaced by the Bretton Woods institutions (the International Monetary Fund and Bank for International Settlements) which pegged currency of participating nations to the US dollar, which was redeemable nominally in gold. In the 1970s this redemption ceased, leaving the system without a formal base. Some consider the system today to be based on oil, a universally desirable commodity due to the dependence of so much infrastructural capital on oil supply. Since OPEC prices oil in US dollars, the US dollar remains a reserve currency, but is increasingly challenged by the euro, and to some degree the Japanese yen.

United States balance

Balance of payments (millions of dollars)
Period ending 1960 1970 1980 1990 2000 2003
Current account
Exports of goods and services and income receipts (+) 30,556 68,387 344,440 706,975 1,421,429
Imports of goods and services and income payments (−) −23,670 −59,901 −333,774 −759,290 −1,779,188 −1,778,117
Unilateral current transfers, net −4,062 −6,156 −8,349 −26,654 −55,684 −67,439
Capital account
Capital account transactions, net ... ... ... −6,579 −809 −3,079
Financial account
U.S.-owned assets abroad, net (increase/financial outflow (−)) −4,099 −8,470 −85,815 −81,234 −569,798 −283,414
Foreign-owned assets in the United States, net (increase/financial inflow (+)) 2,294 6,359 62,612 141,571 1,046,896 829,173
Net 1,019 219 −20,886 −25,211 62,846 12,012

See also

External links


fr:Balance des paiements nl:Betalingsbalans


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