Term of Art: Balance of Payments

“Balance of payments Macroeconomic term to denote the balance between a nation’s expenditure on imports and its receipts from exports, including invisible imports and exports. If the receipts from exports exceed the cost of imports, the balance is said to be in surplus: if vice versa it is in deficit. It is possible, and is often the case in the UK, to have a deficit balance on visible trade and a surplus balance on invisible trade. The sum of the two balances is known as the ‘balance on current account.’

A deficit can be financed by loans from abroad or by using national gold and foreign currency reserves to finance foreign payments which cannot be met any other way. However, if a deficit persists a government has to readjust permanently the pattern of trade. This may be done: (1) by reducing the value of its currency, making exports cheaper to foreigners and imports dearer, thereby discouraging demand for them; (2) by exchange controls, making it difficult to convert its own currency into foreign currency, thereby restricting investment of capital and spending abroad; (3) by import controls and tariffs to place foreign competitors at a disadvantage in competing with home producers, thereby decreasing demand for imports; (4) by deflating the home economy, by cutting employment and income and reducing the demand for both  home-produced and imported goods.”

Excerpted from: Cook, Chris. Dictionary of Historical Terms. New York: Gramercy, 1998.

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