International Trade

Balance of Payments

The balance of payments is a record of transactions between residents and foreigners. It consists of the current account and the capital and financial account

• Current account: $\text{Curr. Account = }NX+\text{Primary income}+\text{Transfers}$.
  • Goods and services trade: $NX=X-M$.
  • Factor income flows, called net primary income: $\text{Payments to us}-\text{Payments to other countries’ residents}$.
  • Transfer payments, called net secondary income, which includes international aid, for example.
• Capital and financial account: $\text{Cap. \& Fin. Account = Balance on Cap. Account + Balance on Fin. Account}$.
  • Capital account: the acquisition/disposal of non-financial assets, and capital transfers.
  • Financial account: the trade of financial assets between residents and foreigners.

It should be the case (in accounting) that $\text{Current Account}+\text{Cap. \& Fin. Account}=0$. In practice, there are measurement errors causing $\text{Current Account}\approx -\text{Cap. \& Fin. Account}$. The difference is called the net errors and omissions.