BALANCE OF PAYMENTS

The Balance of Payments of a country is a record of all financial transactions between residents of that country and residents of foreign countries.  (Residents in this sense does not just refer to individuals, but would also include companies, corporations and the government).  Thus all transactions are recorded whether they derive from trade in goods and services or transfer of capital.

Like all balance sheets, the balance of payments is bound to balance.  For if the country has "overspent", then it must have acquired the finance for this "overspending" from somewhere (either by running up debts or using its reserves), and when this item is included in the accounts they will balance.  It follows therefore that when reference is made to a balance of payments "deficit" or "surplus", this only looks at a part of the total transactions, e.g. that part involving trade in goods and services, which is termed the "Balance of Payments on the current account"

If   the value of exports exceed the value of imports the balance of payments is said to be in Trade Surplus.  This is regarded as a favourable position because a persistent trade surplus means lower international debts.  Also, a trade surplus is regarded as a sign of success in the country's trade with other countries and is, therefore, politically desirable.

On the other hand, if the value of imports exceed the value of exports, the balance of payments is in trade deficit. This is an unfavourable position because a persistent balance of payment trade deficit means the country's foreign exchange reserves are being run down and so is its ability to pay for its imports and settle its international debt.  Also persistent balance of payments trade deficit is regarded as a sign of failure in the country's trade with other countries and is therefore politically undesirable.