See also: List of Economic Topics

BALANCE OF PAYMENTS - macroeconomics

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.

Overview

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.

All monetary transactions of a country are summarized in two primary accounts:

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 acoounts : trade account, income account and transfers 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 is 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 are more than 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 positive 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 negative 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.

History

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 yuan (which is not traded outside China legally, but due to this is almost immune to any degree of chaos on the world's financial markets).

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
International investment position
Money supply