Series 7: 9.3.1. Balance Of Payments

9.3.1. Balance of Payments

The balance of payments is a record of a country’s international economic activity over a given period of time, usually quarterly or annually. It is used to track the flow of money in and out of an economy. As shown on any accounting statement, transactions that cause money to flow into the country are a credit to the account, and transactions that cause money to flow out of the country are a debit.

The balance of payments statement divides international transactions into three accounts, the most important being the current account and the financial account. The current account keeps track of imports and exports, as well as services such as tourism and business consulting. The financial account records capital transfers, such as U.S. investment abroad (capital outflows) and foreign investment in the U.S. (capital inflows). Capital inflows and exports are a credit; capital outflows and imports are a debit.

In theory, the balance of payments should always net to zero. Money flowing into the U.S. should always equal money flowing out. So when we talk of a balance of payments deficit or surplus, we usually are concerned about a current account or a financial account imbalance, but not both. An excess of imports over exports should be compensated by an excess of capital inflows over outflows.