Balance of Payments

The balance of payments is the record of one country's trade dealings with the rest of the world. It has two main parts. The current account shows the flows of trade in visible and invisible goods (like services) plus the net effect of interest, profits, dividends and transfers. The capital account shows flows of investment and other (financial) capital (payment and repayment of debts). 'Official financing', in the form of changes in the central bank's holdings of gold and foreign currency and debt, meets any overall deficit when the current and capital accounts are added together (ignoring statistical errors). By definition the balance of payments must balance. 'Balance of payments surplus' or 'balance of payments deficit' are therefore slightly misleading terms. A current account balance of payments deficit that is judged to be unsustainable will need remedial action. Although it is often seen as a symbol of a country's economic virility, a balance of payments surplus is not necessarily beneficial since it involves the central bank holding more assets in the form of short-term foreign government debt, and this typically earns a lower rate of return compared to other ways of investing taxpayers' contributions to public investment.

24 Balance of Trade Balance of Trade

A component of the balance of payments. Balance Sheet

A statement at the end of a period (usually a year) of the wealth of a person or organization. The balance sheet consists of various stocks: assets (cash, bank deposits, stocks of goods and other easily realizable assets, debts owed to the person/organization, investments, for example other organizations that are owned by the person/organization and fixed assets like buildings less depreciation); and liabilities (debts owed to lenders, such as bank loans and overdrafts; debts to other creditors, and the shares owned by shareholders). Cf. profit and loss account, which records flows: changes in an organization's net worth or wealth over the period.

The basic equation in accounting is assets = liabilities + equity, so equity is assets less liabilities.

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