What is the balance of payments?

The balance of payments (BOP) records all financial transactions made between consumers, businesses and the government in one country with others

Key terms to know when studying the balance of payments

Balance of payments

Records all financial transactions made between consumers, businesses and the government in one country with others

Balance of Payments Account

It consists of goods and services account, primary income account, secondary income account, capital account, and financial account.

Balance of trade

The value of exports of goods and services minus (-) the value spent on imported goods and services

Capital account

Sale/transfer of patents, copyrights, franchises, leases and other transferable contracts, and goodwill

Current account

The overall balance of trade in goods and services and net balance for primary and secondary income

Current account deficit

A deficit occurs when the value of imports of goods/services / investment incomes / secondary incomes is greater than the value of exports

Current account surplus

A surplus occurs when the value of exports of goods/services / investment incomes / secondary incomes is greater than the value of imports

Financial account

Includes transactions that result in a change of ownership of financial assets and liabilities betwen

Foreign direct investment

An investment made by a firm or individual in one country into business interests located in another country

Hot money (short term capital) flows

Money that moves rapidly around the global financial system seeking the best "risk-adjusted" rate of return

Investment income

The most common types of investment income are income on equity (dividends) and income on debt (interest)

Portfolio investment

Inflows and outflows of debt and equity

Primary income

Includes incomes from interest, profits, dividends generated from foreign investment and also migrant remittances i.e. payments from people living and working overseas

Remittances

Transfers of money across national boundaries by migrant workers

Secondary income

Includes spending on military aid, overseas development aid

Trade deficit

When the value of imported goods and services is higher than the value of a country's exports (M>X)

Trade surplus

When the value of exported goods and services is higher than the value of a country's imports (X>M)