Balance of payments
The balance of payments is a record of all economic transactions between a country and the rest of the world.
Every transaction a country makes with the rest of the world is recorded somewhere in one vast ledger: the balance of payments.
The balance of payments is a systematic record of all economic transactions between a country and the rest of the world over a period, covering trade in goods and services, income flows, and financial movements. By construction it always balances, which is both its elegance and a source of confusion.
The main accounts
The balance of payments is divided into accounts. The current account records trade in goods and services, plus income and transfers, and is what people usually mean by a trade surplus or deficit. The financial account records flows of investment and lending, the buying and selling of assets across borders. The two are linked: a country importing more than it exports, running a current account deficit, must finance the gap by attracting capital from abroad, recorded in the financial account.
Why it always balances
By accounting identity, the balance of payments as a whole sums to zero: every flow has an offsetting entry. A current account deficit is necessarily matched by a financial account surplus, capital flowing in to fund it, and the reverse. This is not a happy coincidence but a definition, and it carries an important lesson: a country that consumes more than it produces is borrowing from the rest of the world, while one that produces more than it consumes is lending to it.
What the imbalances mean
Surpluses and deficits in the current account are neither automatically good nor bad. A deficit may reflect productive investment financed from abroad, or unsustainable overconsumption; a surplus may reflect competitiveness, or weak domestic demand. Persistent large imbalances can signal trouble and can prove hard to sustain, but reading them requires understanding why they arise, not just their sign.
The balance of payments is the framework for understanding a country's economic relations with the world, and the discipline it imposes, that deficits must be financed and surpluses lent out, cuts through a great deal of loose talk about trade. Its iron logic, that what is bought from abroad must somehow be paid for, anchors the analysis of international economics.