alance of Payments is the relationship between the amounts of money a nation spends abroad and the income it receives from other nations. The balance of payments is officially known as the Statement of International Transactions and includes two main accounts. The first, the current account, tracks activity in merchandise trade - exporting and importing, income earned from investments abroad, money paid to foreign investors, and transactions on which the government expects no returns. The second, the capital account, tracks both loans given to foreigners and loans received by citizens. It is well known that the balance of payments is the reflection of a nation's financial stability in the world market, and because of that the International Monetary Fund (IMF) uses these accounts to make decisions such as qualifying a country for a loan. Strictly speaking, the balance of payments always balances because of official financing. However, a balance of payments deficit means a persistent and large negative balance for official financing. This can be the result of excessive purchases of foreign goods and services or excessive investment overseas. In the short term, a balance of payments deficit can be corrected by continued borrowing of foreign currency, increasing interest rates to attract overseas investors, imposing exchange controls, imposing tariffs and finally import quotas. In the long run, the government can correct a balance of payments deficit by reducing demand in the economy for all goods including imports. The balance of payments can be used as an indicator of a nation's economic stability. Changes in the balance of payments can affect the exchange rate of a country's currency. For example, a deficit in merchandise trade means that the currency of that nation is flooding the world economy, since it is being used to buy the imports that cause the deficit. Unless government controls are used, the value of the currency will most like...
