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When referring to the balance of payments for a given country, there are actually three slightly different scenarios that may be under consideration. While all three of the applications of this term have to do with financial transactions, the scope of the type of transactions may be narrow in some applications, and rather broad in others. Here are examples of the three usual ways that a country’s balance of payments is identified.
One common reference to the balance of payments has to do with the financial transactions that occur during a specified period of time for a country. When used in this manner, the balance of accounts is concerned only with transactions that are classified as current account transactions. Basically, this means buying and selling of goods and services, as well as scheduled payments on outstanding indebtedness.
The second application of this term may refer to not only the financial transactions conducted in the given period, but some of the long-term capital movements that have some activity during the period. This might include loans extended to other countries, as well as any other loan of goods and services through some sort of economic exchange. This particular application is certainly more sweeping, as it includes just about all transactions made by a country, with an emphasis on payment history and evaluation of any currency exchange that may be relevant to calculating the overall worth of the transactions.
A third common use for the concept of a balance of payments takes into account any and all factors that were not included in either of the other two scenarios. With this usage of a balance of statements, line items such as the relationship between foreign currency and domestic currency, the balance of trade, capital accounts, and invisible balances all are part of the statement. By far, this third concept of a balance of payments is the most comprehensive, and is also the most helpful if the idea is to get a broad understanding of the financial status of a particular country.
Like most types of accounting statements, the balance of payments can be very helpful in making sure the country is fiscally solid, capable of working ethically with other countries, and in a position to take care of the citizens that reside with the borders of the country. By including transactions that involve the citizens of the country, businesses, and government agencies located within the country, a balance of payments can be an accurate and informative document.
@Charred - Well, I still think that the United States leads the way with Research and Development. We develop things like iPhones and other gizmos that the Chinese and other countries want.
Of course, it’s also true that once they import those goods they reverse engineer them so that they can build their own copies, but I guess that comes with the territory.
The U.S. has to focus on being on the cutting edge of next generation technology so that when the breakthroughs happen, the rest of the world will want what we have. We can’t compete just churning out stuff on an assembly line.
I think the third definition of the balance of payments is what people usually think of when they talk about trade deficit.
It’s no secret that the United States has been experiencing a big trade deficit with other nations for quite some time now. Basically that means that we are importing more than we are exporting; we’ve become a net importer. Why is that?
I think it’s obvious. Other countries, like China for example, can make stuff a lot cheaper than we can. They don’t have to pay their workers decent wages and they certainly don’t offer healthcare.
So they produce goods dirt cheap, at prices that we cannot possibly compete with. We end up buying more than we sell. Is there any way to change this situation around without affecting our standard of living? I don’t know.