Balance of payments

Today, we turn our attention to a fundamental concept in international economics: the balance of payments. This is a comprehensive record of all economic transactions between residents of a country and the rest of the world over a specific period. It tracks the movement of money for goods, services, investments, and financial transfers. Understanding the balance of payments helps explain how nations interact economically, the reasons for deficits or surpluses, and the impact on currencies and economic stability. The balance of payments is divided into three main accounts: the current account, the capital account, and the financial account. The current account records trade in goods and services, income from investments abroad, and transfers such as remittances. The capital account includes relatively minor transfers, such as debt forgiveness and transfers of non-produced, non-financial assets. The financial account captures flows of investments and loans, including foreign direct investment and portfolio investment. The trade balance refers specifically to exports minus imports, while the broader current account includes other income sources as well. Countries that import more than they export must find a way to pay for this excess. Since most international payments require strong, widely accepted currencies—such as the US dollar, Euro, or British pound—nations need to maintain sufficient foreign exchange reserves. If a country runs a current account deficit, it must attract investment or borrow from