4. The Balance of Payments
h. describe the balance of payments accounts including their components;
i. explain how decisions by consumers, firms, and governments affect the balance of payments;
What is a country's balance of payments accounts?
A country's balance of payments accounts records its international trading, borrowing, and lending.
What are the three categories of the balance of payments?
1. Current account - records payments, receipts, net interest paid
2. Capital account - international capital transfers
3. Financial account - documents all international monetary flows related to investment in financial assets such as bonds and stocks
Why is the balance of payments called this?
The balance of payments must balance, meaning the balances of these three components must sum to zero. A deficit in one area implies an offsetting surplus in other areas. A current-account deficit implies a capital-account surplus (and vice versa).