The Balance of Payments
Introduced| English | Meaning |
|---|---|
| balance of payments/ˈbæləns ɒv ˈpeɪmənts/ | A record of economic transactions between an economy's residents and the rest of the world over a period. |
| current account/ˈkʌrənt əˈkaʊnt/ | The part of the balance of payments recording trade in goods and services, primary income and secondary income. |
| financial account/faɪˈnænʃl əˈkaʊnt/ | The balance-of-payments account recording cross-border transactions in financial assets and liabilities, such as direct investment, securities and loans. |
| capital account/ˈkæpɪtl əˈkaʊnt/ | In this course's older two-account terminology, the account for financial investment flows; modern balance-of-payments statistics distinguish the financial account from the narrower capital account for capital transfers and non-produced non-financial assets. |
Recording a country's trade with the world
- Every cross-border transaction is written down in the balance of payments 国际收支.
- It is a full record of money flowing in and out of a country.
- It splits into two main accounts that, together, tell the whole story.
- The trick is seeing how the two accounts fit together.
The balance of payments records:
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It is the full record of cross-border money flows.
Importing more goods than you export gives a current account ______.
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More money leaves for imports than arrives from exports.
The current account: goods and income
- The current account 经常账户 records trade in goods and services, plus income and transfers.
- Import more than you export? You run a current account deficit.
- Export more than you import? A current account surplus.
- It is the "buying and selling stuff" account.
The four parts of the current account
A container terminal: exports and imports appear in the balance of payments
A foreigner buying a country's government bonds is recorded in the:
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Buying an asset (a bond) is a financial account entry.
Match each transaction to its account.
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Goods and services → current; assets → financial.
The financial account: assets
- The financial account 金融账户 (older books say capital account 资本账户) records buying and selling assets.
- Foreigners buying a country's shares, bonds, or property all count here.
- It is the "buying and selling ownership" account.
- Money entering to buy assets is a financial account surplus.
Current account or financial account?
The current account records trade in goods, services, and income; the financial account records the buying and selling of assets.
A current account deficit is broadly offset by a financial account surplus.
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The dollars sent abroad return to buy the country's assets.
A US current account deficit of 100 is matched by a financial account surplus of 100. What do the two accounts sum to?
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−100 + 100 = 0. Money that left as imports returned as investment.
Why the two accounts offset
- Key idea: the two accounts broadly offset each other. The dollars that leave must return.
- A current account deficit (money sent abroad for goods) comes back as foreigners buy your assets — a financial account surplus.
- Worked idea. Americans buy $100 of Chinese goods → a US current account deficit of $100. China uses those dollars to buy $100 of US bonds → a US financial account surplus of $100.
- The two sum to zero: money that left as imports returned as investment.
The balance of payments records all money in and out. The current account (goods, services, income) and the financial account (assets) broadly offset: a current account deficit is matched by a financial account surplus, because the dollars that leave return as investment ($-100$ and $+100$ sum to zero).
Write from a current-account deficit of 70
- The current account is in deficit by 70.
- The financial account surplus is 70. Find the sum.
A current account deficit of 70 is matched by a financial account surplus of 70. What do the two accounts sum to, and why do they offset?
Minus 70 plus 70 is 0.
What do the two accounts sum to?
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A deficit of 70 and a surplus of 70 cancel. Other options — 140 (the two 70s added as positives); 70 (the deficit left unmatched).