Balance of Payments
A statement or record of a country's economic transactions with the all other countries over a specific time period (often a year).
Credit and Debit Items in the Balance of Payments
Credits: Money Inflows
Credits represent payments received by the economy from others.
These include but are not limited to:
- Exports of goods and services: Payments received for selling products abroad.
- Foreign investments: Money from foreign investors buying domestic assets.
- Income from abroad: Earnings from overseas investments or wages.
Debit Items: Money Outflows
Debits represent payments made from the economy to others.
These include but are not limited to:
- Imports of goods and services: Payments made for purchasing foreign products.
- Investments abroad: Money spent by domestic investors on foreign assets.
- Income payments: Wages or returns paid to foreign investors.
This can be related to the demand and supply of the currency.
In balance of payments, credits leads to a foreign demand of the country's currency whereas debits leads to a supply of the country's currency.
Surplus or Deficit on an Account
What is a Surplus?
A surplus occurs when the total value of credit exceeds the total value of debit (excess credits).
This means the country earns more from its international transactions than it spends on international transactions.
What is a Deficit?
A deficit occurs when the total value of debit exceeds the total value of credit.
This means the country spends more on its international transactions than it earns from international transactions.
AnalogyThink of the balance of payments like a bank statement. Credits are deposits (money coming in), while debits are withdrawals (money going out). The goal is to understand whether the account is in surplus or deficit.
ExampleIf a country exports $100 billion worth of goods and imports $80 billion, it has a trade surplus of $20 billion. Conversely, if it imports $120 billion, it has a trade deficit of $20 billion.
