Track D · TradeNode D2
Balance of payments without tears
Layer 1 · Pocket
~ 30s readThe thirty-second answer
What is this?
Every country's external accounts must balance to zero, by accounting identity. Trade deficits are matched by capital surpluses. "We are running a trade deficit" and "we are receiving foreign investment" are the same sentence in different words.
Why should I care?
It makes most popular trade-deficit commentary incoherent. "The trade deficit is bad and we should stop foreign investment to fix it" is self-contradictory by definition. The interesting questions are about the kinds of inflow and trade, not the levels.
Balance of payments · everything sums to zero
- Current account (trade-ish)
- −$X
- Capital account (investment)
- +$X
- Errors / reserves
- ≈ 0