Trade between countries shows up in GDP as net exports. The balance of payments is the full record of a country's dealings with the rest of the world: not just goods, but income and assets too.
Key idea
The current account records trade in goods and services, income earned on investments abroad, and transfers (like money sent home to family). The financial account records purchases of assets across borders: stocks, bonds, factories, buildings. A small capital account records some capital transfers. Together they balance: current account + capital account + financial account = 0. This course uses the AP convention: a net inflow of foreign capital is a financial account surplus.
Why it works
Every international purchase is paid for somehow. If Americans buy \$100 more of goods from abroad than they sell, foreigners end up with \$100 of extra dollars. They do not throw them away: they use them to buy U.S. assets, such as Treasury bonds, stocks or real estate. So a current account deficit of \$100 is matched by a financial account surplus of \$100: the country is selling assets to (or borrowing from) the rest of the world. In real data a statistical discrepancy is needed to make the books balance exactly.
Worked examples
Worked example: The current account
In billions: exports of goods and services 2,500; imports 3,100; net income from abroad +150; net transfers −100. Find the current account balance.
- Trade balance: $2{,}500 - 3{,}100 = -600$.
- Current account: $-600 + 150 - 100 = -550$ billion dollars, a deficit.
Answer: −\$550 billion
Worked example: Balancing the accounts
A country's current account deficit is \$500 billion and its capital account is about zero. What is its financial account balance?
- The accounts sum to zero, so the financial account is $+500$ billion.
- A surplus: foreigners bought \$500 billion more of its assets than its residents bought abroad.
Answer: +\$500 billion
Common mistake
Thinking a trade deficit means money is draining out of the country. The dollars come back as foreigners buy U.S. assets, shown as a financial account surplus. Whether that borrowing is a problem depends on what it pays for, which is a separate question. Check: the two big accounts must offset each other.
See it with real data: the U.S. trade balance in goods and services on the Economic Data page.