Glossary
Balance of Payments (BOP)
A comprehensive record of all economic transactions between residents of a country and the rest of the world over a specific period, typically a year.
Example:
If the U.S. Balance of Payments shows a net inflow of money, it means the country received more foreign currency than it spent abroad.
Balance of Payments Deficit
Occurs when the sum of a country's current account and capital account balances is negative, indicating more money flowing out than in.
Example:
If a country's current and capital accounts combined show a -$50 billion balance, it has a Balance of Payments Deficit that must be covered by drawing down official reserves.
Balance of Payments Surplus
Occurs when the sum of a country's current account and capital account balances is positive, indicating more money flowing in than out.
Example:
A country experiencing a Balance of Payments Surplus will see its central bank accumulate more foreign currency in its official reserves.
Capital Account
A component of the Balance of Payments that records international capital transfers and the acquisition or disposal of non-produced, non-financial assets.
Example:
If a foreign company buys a factory in the U.S., this transaction would be recorded as a positive entry in the U.S. Capital Account.
Circular Flow of Dollars
The concept that dollars sent abroad for imports or investments eventually return to the domestic economy through foreign purchases of domestic goods, services, or assets.
Example:
When Americans buy French wine, those dollars go to France, but eventually, the French might use those dollars to buy American airplanes, illustrating the Circular Flow of Dollars.
Current Account
A component of the Balance of Payments that records a country's net trade in goods and services, net earnings on investments, and net transfer payments.
Example:
When a country sells more cars and software to other nations than it buys, its Current Account will likely show a surplus.
Exports
Goods and services produced domestically and sold to residents of other countries.
Example:
When American farmers sell their soybeans to China, those sales are considered U.S. Exports.
Financial Investments
The purchase or sale of financial assets such as stocks, bonds, and other securities across international borders.
Example:
A Japanese pension fund buying U.S. Treasury bonds is an example of a Financial Investment inflow into the U.S. capital account.
Imports
Goods and services produced in other countries and purchased by domestic residents.
Example:
Buying a German-made car in the United States is an example of a U.S. Import.
Net Exports (Trade Balance)
The difference between a country's total value of exports and its total value of imports over a given period.
Example:
If Japan exports 80 billion in oil, its Net Exports would be a positive $20 billion.
Net Investment Income
The difference between investment income received by domestic residents from foreign assets and investment income paid to foreign residents on domestic assets.
Example:
If U.S. citizens earn more dividends from their investments in European companies than Europeans earn from their investments in U.S. companies, the U.S. has positive Net Investment Income.
Net Transfers
The difference between unilateral transfers (like foreign aid, remittances, or grants) received by a country and those sent by a country.
Example:
When a country sends more humanitarian aid to other nations than it receives, it will have negative Net Transfers.
Official Reserves
Foreign currency, gold, and other international reserve assets held by a country's central bank to manage its exchange rate and balance of payments.
Example:
The Federal Reserve might use its Official Reserves of euros to intervene in currency markets and strengthen the dollar.
Official Reserves Account
A component of the Balance of Payments that records changes in a country's holdings of foreign currency, gold, and other international reserve assets by its central bank.
Example:
If a country has a Balance of Payments surplus, its central bank will add to its Official Reserves Account by accumulating more foreign currency.
Real Investments
The purchase or sale of physical assets like land, buildings, or entire businesses across international borders.
Example:
When a German automaker builds a new factory in South Carolina, it's considered a Real Investment in the U.S. capital account.
Trade Deficit
Occurs when a country's total value of imports exceeds its total value of exports.
Example:
The U.S. often experiences a Trade Deficit because it imports more consumer goods and oil than it exports.
Trade Surplus
Occurs when a country's total value of exports exceeds its total value of imports.
Example:
If South Korea sells more semiconductors and cars abroad than it buys foreign goods, it has a Trade Surplus.