What is the balance of payment?
- An accounting of funds that flow into and out of a country comprised of the capital and current account
- The current account is a portion of payments comprised of the trade balance of goods and services
- The Capital account is a portion of the balance payment comprised of foreign purchases of US assets minus US purchase of foreign assets plus the change in official reserves
- The capital account + current account will equal 0
- Investments are part of the capital account, but income from investments are part of the current account
- If there is a trade deficit, then the deficit is in the current account and there is a surplus in the capital account
How do I remember it?
- Just think of balance, if you remember capital account and current account, then know that they balance each other out because balance means it will always equal 0. Think about money flowing in and out of a country, and the numbers must be balanced through the capital and currency account.
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By Abraham Flores
