The Balance of Payments

A country's balance of payments records all its economic transactions with the rest of the world over a period. The current account covers trade in goods and services, plus income such as interest and dividends and transfers such as remittances. The financial account records purchases and sales of assets, including foreign direct investment, stocks, bonds and bank deposits.

Because every payment must be financed somehow, a current account deficit is matched by a financial account surplus: a country that buys more than it sells abroad is borrowing from, or selling assets to, foreigners. Deficits are not automatically bad, since a young, fast-growing economy may borrow to invest, but persistent large deficits financed by short-term loans can leave a country vulnerable if lenders suddenly stop.

Equally, large surpluses, such as those run by Germany or China, raise debates about global imbalances and whether some countries save too much while others borrow too much.