Balance of

Payments –
Measurement
& Management
Definition
The balance of payments is the record of all international trade and
financial transactions made by a country’s residents.

The balance of payments has three components

• Current account
• Financial account
• Capital account
Surplus
A balance of payments surplus means the country export more than it
imports. It provides enough capital to pay for all domestic production and
might even lend outside its borders.

A surplus boosts economic growth in the short term. There are enough
excess savings to lend to countries that buy its products. The increased
exports boost production in its factories, allowing them to hire more people.

In the long run, the country becomes too dependent on export-driven

growth. It must encourage its residents to spend more.
Current Account
• Current accounts measure international trade, net income on
investments, and direct payments.

• The current account measures a country’s trade balance plus the

effects of net income and direct payments. When the activities of a
country’s provide enough income and savings to fund all their
purchases, business activity, and government infrastructure spending,
then the current account is in balance.
Current Account Deficit
A current account deficit is when a country’s residents spend more on
imports than they save. Other countries lend funds or invest in, the
deficit country’s businesses to fund that deficit. The lender country is
usually willing to pay for the deficit because its businesses profit from
exports to the deficient country. In the short run, the current account
deficit is a win-win for both countries.
But if the current account deficit continues for a long time, it will slow economic
growth. Lenders will begin to worry whether they will get an adequate return on
their investment. If demand falls off, the value of the borrowing country’s currency
may also decline. This fall in currency value leads to inflation as import prices rise.
It also creates higher interest rates as the government must pay higher yields on its
bonds.
Current Account: Trade Balance
The trade balance measures a country’s imports and exports. This
portion is the largest component of the current account, which is itself
the largest component of the balance of payments.

Most countries try to avoid a trade deficit, but it’s a good thing for
emerging market countries. It helps them grow faster than they could if
they maintained a surplus.
Financial Account
The financial account measures changes in domestic ownership of
foreign assets and foreign ownership of domestic assets. If foreign
ownership increases more than domestic ownership does, it creates a
deficit in the financial account. This increase means the country is
selling its assets, like gold, commodities, and corporate stocks, faster
than the nation is acquiring foreign assets.
Capital Account
The capital account measures financial transactions that don’t affect a
country’s income, production, or savings. For example, it records
international transfers of drilling rights, trademarks, and copyrights.
Many capital account transactions rarely happen, such as cross-border
insurance payments. The capital account is the smallest component of
the balance of payments.
Balance of Trade
➢Refers to the difference between a country’s value of imports against
its exports.
Balance of Payments - Implications
➢A country’s balance of payments tells you whether it saves enough to
pay for its imports. It also reveals whether the country produces
enough economic output to pay for its growth.

➢A balance of payments deficit means the country imports more

goods and services, and capital than they export. It must borrow from
other countries to pay for its imports.
References
• https://www.econlib.org/library/Enc/BalanceofPayments.html

• https://www.khanacademy.org/economics-finance-domain/ap-
macroeconomics/ap-open-economy-international-trade-and-
finance/the-balance-of-payments/a/the-balance-of-payments