The U.S. Balance of Payments

A balance of payments is a systematic record of a country’s receipts from, or payments to, other countries. In a way, it is like the balance sheets for businesses, only on a national level.

As you can imagine, bookkeeping for an entire country is an enormous task, and it is made excruciatingly complex by the infinite variety of goods and services that flow between countries. The process is simplified somewhat because it is only the actual payments that enter and leave the country which are recorded, and not the movement of goods themselves (thus the term “balance of payments”). Each payment is categorized as to commodity, service, and so on and recorded as a debit if the funds leave the country and a credit if the funds enter the country.

There are three primary accounts in the balance of payments. They are shown below with their primary components. Any international payment or receipt is recorded in one of these categories.

1. Current Account,
   1. Goods and Services
      1. Merchandise trade (“visible” trade)
      2. Service (“invisible” trade)
2. Capital Account
   1. Private investments
   2. Transactions of central banks
3. Official Settlement

In the worldwide flow of funds, it is interesting to note that the amount of money flowing through the Capital Account (investments and central bank transactions) is ten times larger than the amount flowing through the Current Account (goods and services, and foreign aid). This is partly because of the speed and ease with which massive amounts of money can be transferred across borders. The payment for 10,000 bushels of wheat, while it can be transferred with ease, still must wait until the physical commodity is transported before it is made.

The references we see in the media to the “balance of trade” usually refer only to goods within the Goods and Services category of the Current Account. It is also known as merchandise or “visible” trade because it consists of tangibles like foodstuffs, manufactured goods, and raw materials. “Services,” the other part of that category, is known as “invisible” trade and consists of intangibles such as interest or dividends, technology transfers, services (like insurance, transportation, financial), and so forth.