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What is a Basic Balance?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 15 November 2016
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A basic balance is a type of measurement that adds capital account and current account balances as a means of identifying the balance of payments for a specific nation. This particular measurement may be employed to assess the balance of payments as they apply to all private and public industries operating within the nation, or all business as a whole. The strategy provides a viable alternative to using other approaches to arrive at the balance of payments.

The purpose of identifying the balance of payments for a given period is to determine the relationship between the amount of money that is coming into the country and the amount of money that flows out to other countries. Ideally, the balance between these two amounts will be within a range that the nation considers beneficial for the internal economy of that country. In the event that the basic balance indicates that the difference between the inflow and outflow of money is not within acceptable limits, steps can be taken to correct the situation and recover a more equitable balance.

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Since the balance of payments is normally calculated on at least a quarterly basis, the outcome of identifying the basic balance makes it relatively easy to identify recently emerging trends that may have long-term ramifications for the nation’s economy. For example, if the basic balance indicated that a trend of a reduced cash flow into the country was in its early stages, the government could take steps to implement various policies and procedures that would over time overtake the trend and minimize its effect on the economy in general. From this perspective, the data that is generated by the basic balance is very valuable, as it allows for preparation to deal with projected events in a manner that increases the chances of maintaining a stable economy even in the face of an undesirable economic trend.

While the ideal basic balance is actually zero, indicating a perfect balance between the inflow and outflow of money, nations rarely if ever experience this phenomenon for any period of time. Most countries will identify a range between surplus and deficits that is considered acceptable, based on specifics regarding the resources and types of industries that operate within the their borders. Should the basic balance indicate an upcoming movement outside that range, strategies can be implemented to slow that movement, and prevent the impact of that trend from resulting in as much damage to the economy as would have occurred if the trend had never been identified.

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