Balance of Payments

What is the balance of payments?

The balance of payments is a record of all economic transactions between the residents of a country and the rest of the world over a period, usually a year. It records inflows (credits, such as export earnings) and outflows (debits, such as payments for imports).

The current account

Its main component is the current account, which covers:

• The balance of trade — the value of goods exported minus the value of goods imported.
• Services (invisible trade) such as tourism and transport.
• Income and transfers such as workers' remittances.

Surplus and deficit

A country has a surplus when total receipts exceed total payments, and a deficit when payments exceed receipts. A current-account deficit often arises when a country imports more than it exports, or when much money is spent on foreign services such as overseas travel. A surplus, in turn, shows the country earns more from the rest of the world than it pays out.

Correcting a deficit

To correct a deficit, a country can promote exports (improve quality and competitiveness), reduce imports (tariffs, quotas, encouraging local goods), or boost tourism and foreign investment to raise receipts. A large, persistent deficit can run down foreign-exchange reserves and weaken the currency, so it must be managed carefully.

Why the balance of payments matters

The balance of payments shows a country's economic standing against the rest of the world. A healthy surplus reflects competitive exports and adds to reserves, while a large deficit signals that the country is spending more than it earns from external trade. The government and the central bank use this information to design suitable trade and monetary policies.