balance of payments

balance of payments balance between all payments out of a country within a given period and all payments into the country, an outgrowth of the mercantilist theory of balance of trade . Balance of payments includes all payments between a country and its trading partners and is made up of the balance of trade, private foreign loans and their interest, loans and grants by governments or international organizations, and movements of gold (capital account). A chronically unfavorable balance of payments, when debits exceed credits, may affect the stability of the nation's currency, particularly where exchange rates are no longer fixed. After World War II the International Monetary Fund was established to handle problems relating to the balance of payments and foreign exchange.

Since the late 1950s the United States has generally experienced an unfavorable balance of payments because of large-scale foreign aid, sizable U.S. investment in Europe, and major U.S. military investments abroad. In the early 1970s the United States, in an effort to create a more favorable balance of payments, announced (1971, 1973) a devaluation of the U.S. dollar. However, the increase in the cost of petroleum from the Arab states (1973-74) had a negative effect on the balance of payments in the United States and most countries in Western Europe. In addition, tight money policies and high deficits adversely affected the savings rate in the United States in the 1980s and caused the balance of payments to decline even further. As a result, the United States looked to foreign borrowing to fill the gap, but the interest payments only increased the shortfall in the balance of payments. In the late 1990s and 2000s the U.S. balance of payments reached record negative levels.

Bibliography: See N. Fatemi, Problems of Balance of Payment and Trade (1975); T. De Saint Phalle, Trade, Inflation, and the Dollar (1981); D. Bigman, ed., Floating Exchange Rates and the State of World Trade Payments (1984).

balance of payments Overall surplus or deficit that occurs as a result of the exchange of all goods and services between one nation and the rest of the world. A country with a balance of payments deficit must finance it by borrowing from other countries or the International Monetary Fund (IMF), or by using foreign currency reserves. Such deficits, if frequent, can pose a serious problem, because they cause a reduction in the reserves. This in turn leads to economic pressure for devaluation in order to correct the imbalance. A country with a surplus is in a favourable position, but may come under international pressure to revalue its currency.