Balance of Payments

Balance of Payments, relationship between the amount of money a nation spends abroad and the income it receives from other nations. The balance of payments is officially known as the Statement of International Transactions and includes two main accounts.


The first, the current account, tracks activity in merchandise trade—exporting and importing; income earned from investments abroad; money paid to foreign investors; and transactions on which the government expects no returns.


The second, the capital account, tracks both loans given to foreigners and loans received by citizens. Because the balance of payments is one reflection of a nation's financial stability in the world market, the International Monetary Fund (IMF) uses these accounts to make decisions such as qualifying a country for a loan.


The IMF also provides the information to its members so that they can make informed decisions about investments and trade.

All balance of payments transactions have an offsetting receipt. Although a country might have a deficit in merchandise trade (indicating that it is importing more than it is exporting), it will show a surplus in another area, such as its investment income.

The balance of payments can be used as an indicator of a nation's economic stability. Changes in the balance of payments can affect the exchange rate of a country's currency. For example, a deficit in merchandise trade means that the currency of that nation is flooding the world economy, since it is being used to buy the imports that cause the deficit. Unless government controls are used, the value of the currency will most likely depreciate.