What Is a Balance of Payments?
The balance of payments is a statement of inflow and outflow payments for a particular country. It is a summary of transactions between domestic and foreign residents in a specific country over a specified time. It represents an accounting of a country's international transactions for a period, usually a quarter or a year. It accounts for transactions by businesses, individuals, and the government.
More Thorough Understanding of The Term
It's an economic concept measuring a country's economic activity and transactions with other countries.
Balance of payments is the total flow of money into and out of a country, determined by a country's balance of trade, foreign aid, foreign investments, military spending, and money spent by tourists in other countries.
Balance of Payments Components
A balance of payments statement can be broken down into various components. Those that receive the most attention are:
- The current account
- The capital account
The Current Account
The current account represents a summary of the flow of funds between one specified country and all other countries due to purchasing goods or services or providing income on financial assets. It includes the following sub-accounts:
- Goods account
This measures a country's imports and exports of tangible goods such as raw materials, manufactured goods, and agricultural products.
- Services account
This measures a country's imports and exports of services such as tourism, transportation, and financial services.
- Income account
This measures the income a country's residents earn from their investments in other countries and non-residents from their investments in the country.
- Current transfers account
This measures the value of transfers of money or goods between countries that do not involve an exchange of goods or services, such as remittances.
The Capital Account
The Capital account represents a summary of the flow of funds resulting from the sale of assets between one specified country and all other countries over a specified time. Thus, it compares the new foreign investments made by a country with the foreign investments within a country over a particular time. It includes the following sub-accounts:
This measures the investment by foreign companies in domestic companies and vice versa.
This measures the investment in financial assets such as stocks and bonds.
- Other investment
This measures loans and other financial transactions, including currency exchange.
- Capital transfers
This measures the transfer of assets such as debt forgiveness, the sale or purchase of non-produced, non-financial assets, and other capital transfers.
In Sentences
- Balance of payments is the overall money flows into and out of a country.
- Balance of payments is a bookkeeping system for recording all funds between a country and foreign countries.