What is Balance of Payments?

Balance of payments is a term that refers to the net value
of transactions that people in one country make with people in another country or
countries.  We tend to use the term balance of payments to mean the same thing as
balance of trade, but it is not exactly the same
thing.

Instead, the balance of payments is made up of a few
different statistics, one of which is the "current account" or balance of trade.  Any
one of the statistical categories can be positive or negative.  One country can have a
trade deficit with another country.  However, the whole balance of payments cannot be
positive or negative.  It must be balanced at a net of zero.  This is because, for
example, when we run a trade deficit with China, it is balanced by them lending us
money.