What a country earns and what it spends abroad,in one account, all on record.
A record of all economic transactions between a country’s residents and the rest of the world over a given period.
The accounts balance overall, so a deficit or surplus belongs to one part of them, usually the current account, and a persistent one is among the things analysts weigh when they assess a currency.
In plain words
The balance of payments is a country’s account with the rest of the world: everything its residents sold, bought, lent, borrowed and invested across the border over a period. Its best-known part is the current account, which covers trade in goods and services and income; the rest records flows of investment and lending.
See it move
Current account and Financial account are in balance
Why it matters
Money that crosses a border has to be exchanged, so these flows are a source of demand for a currency and of supply of it. A persistent current account deficit means a country depends on money flowing in from abroad, which is one of the things analysts weigh when they assess a currency.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
In an invented year a country exports goods and services worth 500 billion and imports 560 billion, with no other current account items.
- 1Current account = 500 − 560 = −60 billion
- 2The 60 billion shortfall has to be paid for
- 3It is matched by 60 billion of net inflowsforeign investment, borrowing or a fall in reserves
The current account shows a deficit of 60 billion, financed by an equal net inflow recorded elsewhere in the accounts.
A common mistake
A “balance of payments deficit” usually refers to one part of the accounts, most often the current account. Taken as a whole the accounts balance by construction, because every payment is matched by a flow that finances it.
Check yourself
Educational information, not investment advice or a recommendation to trade.