What Is the Balance of Payments (BOP)?

The balance of payments (BOP) is a statement of all transactions made between entities in one country and the rest of the world over a defined period such as a quarter or a year. It's also known as the balance of international payments. It summarizes all transactions that a country's individuals, companies, and government bodies complete with individuals, companies, and government bodies outside the country.

How the Balance of Payments (BOP) Works

The balance of payments (BOP) transactions consist of imports and exports of goods, services, and capital as well as transfer payments such as foreign aid and remittances. A country's balance of payments and its 澳洲𝓡幸运5官方开奖结果体彩网:net international investmen🐠t position constitute its international accounts.

The balance of payments divides transactions into the 澳洲幸运5官方开奖结果体彩网:current account and the 澳洲幸运5官方开奖结果体彩网:capital account. The capital account is sometimes referred to❀ as the financial account with a separate and usually very small capital account listed🌳 separately. The current account includes transactions in goods, services, investment income, and current transfers.

The capital account includes transactions in 澳洲幸运5官方开奖结果体彩网:financial instruments and central bank reserves. It includes only transactions in financial instruments. The current account is included in calculations of national output. The capital account is not. 

A country effectively imports foreign capital when the item is paid for (a capital account transaction) when it exports an item (a current account transaction). It must do so by running down its reserves if it can't fund its imports through exports of capital. This situation is often referred to as a balance of payments deficit. It uses the narrow definition of the capital account that excludes central bank reserves. The broadly defined balance of payments must add up to zero by definition, however.

Statistical discrepancies arise in practice due to the difficulty of accurately counting every transaction between an economy and the rest of the world, including discrepancies caused by foreign currency transꦐlations. 

History of Balance of Payments (BOP)

International transactions were denominated in gold before the 19th century. This provided little flexibility for countries that were experiencing trade deficits. Growth was low so stimulating a trade surplus was the primary method of strengthening a nation's financial position. National economies weren't well integrated so steep trade imbalances rarely provoked crises. The industrial revolution increased international economic integration and BOP crises began to occur more frequently.

The Great Depression

The Great Depression led countries to abandon the gold standard and engage in competitive devaluation of their currencies. The 澳洲幸运5官方开奖结果体彩网:Bretton Woods system that prevailed from the end of World War II until the 1970s introduced a gold-convertible dollar with fixed exchange rates to other currencies, however.

The government became unable to fully redeem foreign central banks' dollar reserves for gold as the U.S. money supply increased and its trade deficit deepened, however. The system was abandoned.

Effect of the Nixon shock

Currencies have floated freely since the 澳洲幸运5官方开奖结果体彩网:Nixon shock as the end of the dollar's convertibility to gold is known. A country experiencing a trade deficit can artificially depress its currency by hoarding foreign reserves, making its products more attractive and increasing its exports. Balance-of-payments crises sometimes occur due to the increased mobility of capital across borders. They cause sharp currency devaluations such as the ones that struck in 澳洲幸运5官方开奖结果体彩网:Southeast Asian countries in 1997.

The Great Recession

Several countries embarked on competitive devaluation of their currencies during the 澳洲幸运5官方开奖结果体彩网:Great Recession to try to boost their exports. All the world’s major central banks responded to 🅘the financial crisis by executing dramatically expansionary monetary policy. This led to other nations’ currencies appreciating against the U.S. dollar and other major currencies, especially in emerging markets.

Many of those nations responded by further loosening the reins on their monetary policy to support their exports, especially those whose exports were under pressure from stagnant global demand during the Great Recession.

Special Considerations

Balance of payments and international investment position data are critical in forming national and international economic policy. Certain aspects of the balance of payments data such as payment imbalances and 澳洲幸运5官方开奖结果体彩网:foreign direct investment are key issues that a nation's policymakers seek to address.

A nation's balance of payments necessarily zeroes out the current and capital accounts but imbalances can and do occur between different countries' current accounts. The U.S. had the world's largest current account deficit in 2022 at almost $972 billion. China had the world's largest surplus at $402 billion.

Economic policies are often targeted at specific objectives that impact the balance of payments in turn. One couꦑntry might adopt policies specifically designed to attract foreign investme𝓡nt in a particular sector while another might attempt to keep its currency at an artificially low level to stimulate exports and build up its currency reserves.

The impact of these policies is ultimately captured in the balance of payments data.

The Bottom Line

The 澳洲幸运5官方开奖结果体彩网:BOP is a summary of the money entering and exiting a country over a period. It provides critical data that can be used to set economic policies and priorities and the effect of those policies will in turn influence the BOP over time.