Balance Of Payments

Balance Of Payments

Balance of Payments, part of the nation's accounts that shows payments by residents and their receipts from foreigners resulting from international transactions. Most payments and receipts are for goods or services provided by the citizens of one country to those of others; some payments are 'unrequited transfers such as gifts and loans. The items are therefore divided into several broad categories. This is essential for deciding economic policy, because the remedies for a balance of payments deficit or surplus will differ according to the causes, which emerge only from study of the items. The main components are:

'Visible exports' are the receipts from sales to people in other countries of commodities produced in or re-exported from Britain. 'Visible imports' are the payments to them for the goods they export to us.

The 'invisibles' are the receipts from and payments for shipping, insurance and banking services, interest, profits and dividends, tourism, migrants' funds, gifts and legacies.

The capital account shows the balance of lending between Britain and the rest of the world. It includes loans between the U.K. and other government s as well as long-term and short-term private investments by British citizens in other countries and by them in Britain.

Transfers of gold and convertible currency are called 'accommodating movements' because they result from and reconcile the decisions to import, export, borrow and lend taken by people in Britain and other countries. Surpluses or deficits on the total balance of payments cannot continue indefinitely because no country has infinitely large reserves, and a surplus for one country implies a deficit for one or more other countries. 500ner or later a country which is in deficit has to take action to stop the outflow of its reserves. This means either reducing its payments to people in other countries, increasing its receipts from them, or both. Many ways of achieving this objective are available to >governments, at least in theory. First, devaluation of the exchange rate may stimulate exports and reduce imports; if the domestic economy can produce sufficient exports and substitutes for imports without causing inflation, devaluation may solve the problem. Secondly, internal deflation may cure the trouble by restricting demand for imports and exportable goods and stimulating exports.

The words balance of payments surplus or deficit are often applied to the current account section of the balance of payments. In this sense both can continue for a long time; e.g., if a country earning a large current account surplus is willing to lend it abroad it can carry on earning the surplus without placing its trading partners in difficulties. Britain followed this policy in the nineteenth century and Western Germany for several years after World War II.

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