Balance of Payments

The balance of payments has three main parts. The current account records trade in goods and services, income such as wages, interest and dividends, and transfers such as remittances and foreign aid. The capital account records certain transfers of assets, such as debt forgiveness. The financial account records investment flows, such as purchases of foreign shares, bonds, companies and property, as well as changes in central bank reserves.

In principle, the accounts must balance overall. If a country buys more from abroad than it sells, running a current account deficit, it must finance this by borrowing from abroad or selling assets to foreigners, which appears as a surplus in the financial account.

For example, a country with a current account deficit of 50 billion might attract 50 billion of foreign investment into its shares, bonds and property. In practice, a statistical discrepancy item captures measurement errors.

The balance of payments helps economists judge a country’s external position. Persistent large current account deficits financed by short-term borrowing can make a country vulnerable to sudden outflows of capital and currency crises.