11.1 Policies to Correct Disequilibrium in the Balance of Payments

The balance of payments (BOP) is a record of all financial transactions between one country and the rest of the world over a given period of time (usually one year). Think of it like a country's financial diary — every time money flows into the country or out of it, it gets recorded here.

The balance of payments is made up of three main accounts:

1. The Current Account
2. The Capital Account
3. The Financial Account

The current account records the flow of money from trade in goods and services, as well as certain income and transfers. It has four parts:

• This records exports and imports of physical products — things you can see and touch, like cars, oil, food, and machinery.
• If a country exports more goods than it imports, it has a trade surplus in goods. This is good for the current account.
• If a country imports more goods than it exports, it has a trade deficit in goods. This is bad for the current account.

• This records exports and imports of services — things you cannot touch, like banking, insurance, tourism, and education.
• For example, if a foreign tourist visits your country and spends money, that counts as an export of services (money flows in).
• If your citizens travel abroad and spend money, that counts as an import of services (money flows out).

• This records earnings from investments and wages flowing between countries.
• For example, if a company based in your country owns a factory abroad and receives profits from it, that money flowing home counts as primary income received.
• If a foreign company owns a factory in your country and sends profits back home, that is primary income paid out.