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Country foreign exchange reserves minus external debt. In international economics, the balance of payments (also known as balance of international payments and abbreviated BOP or BoP) of a country is the difference between all money flowing into the country in a particular period of time (e.g., a quarter or a year) and the outflow of money to the rest of the world.
A currency crisis results from chronic balance of payments deficits, and thus is also called a balance of payments crisis. Often such a crisis culminates in a devaluation of the currency. Financial institutions and the government will struggle to meet debt obligations and economic crisis may ensue. Causation also runs the other way.
In macroeconomics, sterilization is action taken by a country's central bank to counter the effects on the money supply caused by a balance of payments surplus or deficit. [1] This can involve open market operations undertaken by the central bank whose aim is to neutralize the impact of associated foreign exchange operations. [2]
The United States, for example, gleans a substantially larger rate of return from foreign capital than foreigners do from owning United States capital. In the traditional accounting of balance of payments, the current account equals the change in net foreign assets. A current account deficit implies a reduction of net foreign assets:
This move was seen as prioritising the balance of payment crisis over the welfare of the Indian people and kick-started P.V. Narasimha Rao's economic reform process. [21] In 2024, the RBI has returned its 100 tonnes of gold reserves to India from the UK for the first time since 1991, and by this process, India started holding most of the gold ...
Furthermore, the US had to run a balance of payments current account surplus to maintain confidence in the US dollar. As a result, the United States was faced with a dilemma because it is not possible to run a balance of payments current account deficit and surplus at the same time.
The balance of payments identity establishes that the current account is equal to the capital account plus the accumulation of international reserves.Therefore, a large slowdown in capital inflows is met either by a loss of international reserves and/or a lower current account deficit, both of which have negative economic effects.
Government deficit spending: a negative government budget balance; fiscal deficit of that year= total borrowing by government Primary deficit, the pure deficit derived after deducting the interest payments; Structural and cyclical deficit, parts of the public sector deficit; Income deficit, the difference between family income and the poverty ...