Balance of Payments-Structure

Balance of payments is an account that records the flows of money from the dealings between the residents of a country and other countries over a period of time. The inflow of money is recorded as a credit item with a positive sign while an outflow is debited with a negative sign. The balance of payments comprises three components, namely the current account, capital account and financial account.

Current account
The current account is made up of trade in goods, trade in services, income and current transfers. The overall balance in the current account is the sum of the four parts. If the outflows (debits) exceed the inflows (credits), there is a current account deficit. But if the inflows surpass the outflows, a current account surplus arises. 

Table 1: U.S. Current account-Trade in goods (in millions of dollars)

Source: Data from the U.S. Bureau of Economic Analysis

Trade in goods is made up of the export and import of goods. Goods are visible items such as computers, cars, etc. Export of goods results in the flow of money into a country (credit item) while import of goods leads to the flow of money out of a country (debit item).  The difference between the export of goods and the import of goods is referred to as the balance of trade in goods, the balance of visible trade or the balance of merchandise. A surplus occurs when exports are more than imports (positive balance) and a deficit occurs when imports exceed exports ( negative balance). In Table 1 above, there was a balance of trade deficit of $913,885 million ($1,432,218 million minus $2,346,103 million) in  2020 and $1,090,296 ($1,761,364 minus $2,851,660 million) in 2021. 

Table 2: U.S. Current account-Trade in services (in millions of dollars)

Source: Data from the U.S. Bureau of Economic Analysis
N.B.
1. All travel purposes include 1) business travel, including expenditures by border, seasonal, and other short-term workers and 2) personal travel, including health-related and education-related travel.
n.i.e. Not included elsewhere 
n.a. Transactions are possible, but data are not available.

Trade in services is a record of the export and import of services, e.g. banking, transport, etc.  The difference between the export of services and the import of services is known as the invisible balance, the balance on services or the balance of trade on services. In Table 2 above, the U.S. recorded balance on services surplus of $259,896 million ($726,433 million minus $466,537 million) in 2020 and $245,248 ($795,273 million minus $550,025 million) in 2021.

Table 3: U.S. Primary and secondary income and capital account (in millions of dollars)

Source: Data from the U.S. Bureau of Economic Analysis
N.B.
2. Secondary income (current transfer) receipts and payments include U.S. government and private transfers, such as U.S. government grants and pensions, fines and penalties, withholding taxes, personal transfers (remittances), insurance-related transfers, and other current transfers.

Income flows represent the inflow and outflow of income accruing to factors of production such as dividends, interest, profit and wages. This is also known as primary income because it is from working (e.g. wages) and possession of financial investments (e.g. dividends). It comprises incomes from direct investment, portfolio investment, reserve assets and other investments (see Table 3 above).

Current transfers, also known as secondary income, are payments made by a country’s residents to another country’s residents without receiving anything in return, e,g, grants or aids from international organisations to the government, international transfers by individuals, etc. The balance on secondary income is the difference between secondary income receipts and payments (see Table 3 above).

Capital account
The capital account is a relatively small part of the balance of payments. It contains flows from capital transfers and non-financial assets. Capital transfers include grants for capital projects, the sale/purchase of fixed assets (e.g. land),  debt forgiveness and money brought in/taken out by migrants. The non-financial assets in this account are intangible assets such as copyrights, patents, trademarks, brand names, right to use land or water for mining or fishing.

Table 4: U.S. Financial account (in millions of dollars)

Source: Data from the U.S. Bureau of Economic Analysis
N.B.
3. Transactions for financial derivatives are only available as a net value equal to transactions for assets less transactions for liabilities. A positive value represents net U.S. cash payments arising from derivatives contracts, and a negative value represents net U.S. cash receipts.

Financial account
Financial account records change in ownership of assets, flow of money for bank deposits and investment. It is a relatively large component for some countries. It includes direct investment (e.g. factories), portfolio investment (e.g. shares), other financial investments (e.g. deposits and bonds) and central bank reserve assets (gold and foreign currencies). Reserves are assets controlled by the central bank for policy objectives such as intervention in the foreign exchange market and to assist the government in meeting its commitments to the International Monetary Fund (IMF) (see Table 4 above).

Table 5: U.S. Balances (in millions of dollars)

Source: Data from the U.S. Bureau of Economic Analysis

Net errors and omissions
Net errors and omissions ensure that the total of all debits is equal to the total of credits of the balance of payments. In Table 5 above, it is -$71,751  in 2020 and $108,231 in 2021. This will bring the overall balance in the balance of payments to zero (e.g. -$619,698 + $619,698 in 2020). When this happens, there is a balance of payments equilibrium. Net errors and commissions represent a balancing figure necessitated by the imbalance arising from delays and omission of items. A country is usually engaged in a large volume of transactions.