Balance of payments

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The balance of payments is an accounting statement of the transactions of a country the rest of the world. The current account of the balance of payments is made up of the "visible balance", consisting of receipts for exports minus payments for imports, and the "invisible balance"consisting of income less expenditure for services (such as banking, insurance, shipping and tourism) plus profits and interest from abroad. The "capital account of the balance of payments"[1] is the net financial inflow from incoming investments from overseas and outgoing overseas investment by domestic investors, together with the net inflow of international grants and loans (this amounts to no more than an accountancy version of the statement that imports are paid for either by exports, or by promises of later returns - which can alternatively be referred to as selling financial assets to foreign investors).

As a matter of logical necessity, for every borrower there must be a lender and the total amount borrowed must be the same as the total amount lent, or in other words, the total amount of debt must be the same as the total amount of savings. In accountancy terms that means that the sum of the balances of payments of all the world's countries must be zero. If savers and borrowers were spread randomly around the world, that would also be true of each country viewed individually. As a matter of observation, that is not true and there have, from time to time, been very large national balance of payments surpluses and deficits. And, as a matter of logical necessity, those surpluses and deficits must be due to national differences in their inhabitants' propensities to save. Such differences may be attributable to differences in prosperity, to social norms, or to different government interest rate, exchange rate, monetary or fiscal policies. In countries that adopt a fixed exchange rate policy, there is a policy necessity to set a limit upon its balance of payments deficit, and failure to do so is termed a "balance of payments crisis".

1. ↑ sometimes referred to as the "capital and financial account" (see the IMF definition on the addendum subpage)