The balance of payments reflects the value of all transactions in international trade, including goods, services, financial assets, and gifts.

The merchandise trade balance gives us the difference between exports and imports of physical items. Included in the current account along with merchandise trade are service exports and imports relating to commerce in intangibleitems, such as shipping, insurance, and tourist expenditures. The current account also includes income earned by foreign residents on U.S. investments and income earned by U.S. residents on foreign investments.

Unilateral transfers involve international private gifts and federal government grants or gifts to foreign nations.

When we add the balance of merchandise trade and the balance of services and take account of net unilateral transfers and net investment income, we come up with the balance on the current account, a summary statistic.

There are also capital account transactions that relate to the buying and selling of financial assets. Foreign capital is always entering the United States, and U.S. capital is always flowing abroad. The difference is called the balance on the capital account.

Another type of balance of payments transaction concerns the official reserve assets of individual countries, or what is often simply called official transactions. By standard accounting convention, official transactions are exactly equal to but opposite in sign from the sum of the current account balance and the capital account balance.

Account balances within a nation's balance of payments can be affected by its relative rate of inflation and by its political stability relative to other nations.

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There are also capital account transactions that relate to the buying and s... View the full answer