Fundamentals of Economics
The balance of payments is a record of all financial transactions made between a country and the rest of the world. It is divided into two main components, the current account and the capital account.
The current account records all transactions related to the import and export of goods and services, income received from abroad, and unilateral transfers, such as foreign aid. A surplus in the current account implies that a country is exporting more than it is importing, while a deficit implies the opposite.
The capital account records all transactions related to financial assets, such as foreign investment and loans. A surplus in the capital account implies that a country is receiving more investment and loans from abroad than it is investing and lending abroad, while a deficit implies the opposite.
It is important to note that the balance of payments must always balance, meaning that the sum of the current account and capital account balances must equal zero. Any surplus or deficit in one account must be offset by an equal surplus or deficit in the other account.
For example, if a country has a trade deficit (importing more than it is exporting) in the current account, it must be financed by a surplus in the capital account (receiving more investment and loans from abroad than it is investing and lending abroad). If a country has a surplus in the current account, it can use the surplus to invest and lend abroad, resulting in a deficit in the capital account.
In summary, the balance of payments is a record of all financial transactions made between a country and the rest of the world. It is divided into the current account, which records transactions related to the import and export of goods and services, income received from abroad, and unilateral transfers, and the capital account, which records transactions related to financial assets. The balance of payments must always balance, with any surplus or deficit in one account being offset by an equal surplus or deficit in the other account.
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