4.6.1—Balance of payments

The balance of payments records transactions between residents and the rest of the world. The current account covers trade in goods and services, primary income and secondary income; the capital and financial accounts record transfers of capital and changes in financial assets and liabilities.

Because each transaction is recorded twice, the accounts balance in accounting terms. A current-account deficit therefore has a counterpart in capital or financial flows, reserve changes or both; it is not the same as a government budget deficit.

A credit records a receipt from abroad or increase in external liabilities; a debit records a payment abroad or acquisition of external assets. For each account, calculate $\text{balance}=\text{credits}-\text{debits}$: a positive result is a surplus and a negative result a deficit. Example: exports of 120, imports of 150, net income of -10 and net current transfers of +5 give current-account balance $120-150-10+5=-35$, a deficit of 35 currency units. Keep the sign convention and period explicit.