What is the Balance Of Payments?

The balance of payments records all financial transactions made between consumers, businesses and the government in one country with other countries. The balance of payment figures shows us about how much is spent by consumers and firms on imported goods and services, and how successful firms have been in exporting to other countries.

The balance of payments is made up of two key parts.

Current account

Capital account

At this stage we will focus on the current account.


The current account is comprised in four parts:

Trade in goods (Visibles)

Trade in services (Invisibles)

Investment income (Profit from overseas)

Transfers (Charity & Overseas Aid)

If a country imports more goods and services than it exports, a current account deficit is said to exist.

Reasons for a Current Account Deficit

1) High Consumer Spending

If there is rapid growth then consumers dispensible income will rise resulting in higher consumer spending. In order to meet demand consumers will begin exporting goods and services.


2) Overvalued exchange rate

When the currency of a country appreciates, it's exports become more expensive relative to other countries. It also becomes cheaper to import, therefore domestic consumers are encouraged to import and domestic firms find it hard to export, thus causing a deficit.


3) Lack of competitiveness

An increase in wages or costs of commodities may be passed on to the consumer in the form of higher prices. Consumers will then begin to import due to the relatively lower prices of foreign goods.

Is a current account deficit a problem?

A current account deficit is a problem if:

The economy struggles to pay debt and is at risk of default

Deficit is long-lasting (structural)

The goods being imported do not contribute to growth

Deficit makes up a large part of GDP