A big account/spreadsheet that measures the inflows and outflows of money into and out of a country, recording international transactions
Components of the balance of payments
Current account (trade in goods, trade in services, primary income, secondary income)
Capital account
Financial account
The capital account is a very small part of the balance of payments
Capital account
Records international transactions that are minor in nature, such as debt forgiveness, inheritance taxes, transfer of financial assets by migrants, sales of tangible and intangible assets
Financial account
The second biggest part of the balance of payments, records portfolio investment transactions (buying/selling of financial assets like bonds, shares, derivatives), foreign direct investment flows, and changes in reserves
A country has a current account deficit
It needs to have a financial account surplus to balance the overall balance of payments
A country has a current account surplus
It can have a financial account deficit to balance the overall balance of payments
If the financial account and capital account cannot balance the current account deficit, the 'net errors and omissions' item is used as a balancing tool
Countries with current account surpluses often invest their excess cash in countries with current account deficits, leading to financial account surpluses in deficit countries
Countries with current account deficits often finance it by borrowing money through issuing bonds and shares, which is not sustainable in the long run
